Evaluation of Financial Performance of Commercial Banks in Namibia (2010-2015)

TABLE OF CONTENTS

LIST OF TABLES

LIST OF FIGURES

ACKNOWLEDGEMENT

DEDICATION

ABSTRACT

CHAPTER ONE
1.0 Introduction
1.1 Background of the Study
1.1.1 Commercial Banks
1.2 Statement of the Problem
1.3 Main Purpose of the Study
1.4 Research Objectives
1.5 Research Question/s
1.6 Research Hypothesis
1.7 Scope of the Study
1.8 Significance of the Study
1.9 Limitations of the Study
1.10 Structure of the Study
1.11 Definition of Key Terms
1.12 Summary

CHAPTER TWO
2.0 Introduction
2.1 CAMELS Model
2.2 Performance of Banks
2.3 Importance of Banks Performance
2.4 Factors affecting Bank’s Performance
2.5 Consequences of poor Performances of Banks
2.6 Domestic, State Owned And Foreign Banks
2.7 Empirical Literature Review
2.8 Models used in Other Empirical Studies

CHAPTER THREE
3.0 Introduction
3.1 Research Design
3.2 Population of the Study
3.3 Sample and Sampling Techniques
3.4 Data Collection
3.5 Reliability and Validity
3.5.1 Reliability
3.5.2 Validity
3.6 Definition of Variables
3.6.1 Capital Adequacy Indicators
3.6.2 Assets Growth Indicators
3.6.3 Management Capability Indicators
3.6.4 Profitability Indicators
3.6.5 Liquidity Indicators
3.7 Summary

CHAPTER FOUR
4.0 Assessment of Banks’ Performance in terms of Financial Indicators
4.1 Capital Adequacy Performance
4.2 Assets Growth Performance
4.3 Management Capability Performance
4.4 Profitability Performance
4.5 Liquidity Performance

CHAPTER FIVE
5.0 Introduction
5.1 Summary of Findings
5.1.1 Capital Adequacy Performance
5.1.2 Assets Growth Performance
5.1.3 Management Capability Performance
5.1.4 Profitability Performance
5.1.5 Liquidity Performance
5.2 Conclusions
5.3 Recommendation
5.4 Suggestions of Further study

REFERENCES

APPENDIX-A

LIST OF TABLES

Chapter1

Table 1.1: Commercials Banks and Regulation Act in Namibia

Chapter3

Table 3.1: Capital Adequacy Indicators

Table 3.2: Assets Growth Indicators

Table 3.3: Management Capability

Table 3.4: Profitability Indicators

Table 3.5: Liquidity Indicators

Chapter 4

Table 4.1:Financial Performance of Standard Bank

Table 4.2:Financial Performance of First National Bank

Table 4.3:Financial Performance of Nedbank

Table 4.4:Financial Performance of Bank Windhoek

Table 4.5: Total Capital Ratio

Table 4.6:Non-Performing Loans to Total Loans

Table 4.7: Interest Spread

Table 4.8: Debt Leverage

Table 4.9:Return on Assets

Table 4.10:Return on Equity

Table 4.11:Cost to Income

Table 4.12: Liquid Assets to Deposits

Chapter 5

Table 5.1:Total Capital

Table 5.2: Non-Performing Loans

Table 5.3:Total Assets

Table 5.4: Profit after Tax

Table 5.5: Liquid Assets

LIST OF FIGURES

Figure 3.1: Sampling of Commercial Banks

Figure 5.1: Total Capital Amount

Figure 5.2: Total Capital Ratios

Figure 5.3: Net performing Loans Amount

Figure 5.4: Net performing Loans Ratios

Figure 5.5: Total Assets Amount

Figure 5.6: Total Assets Ratios

Figure 5.7: Cost of Fund Ratios

Figure 5.8: Profit after Tax Amount

Figure 5.9: Net Interest Margin Ratios

Figure 5.10: Liquid Assets Amount

Figure 5.11:Liquid Assets to Total Assets Ratios.

ACKNOWLEDGEMENT

I would like to provide warm thanks to Dr. Gift Kavari, for being a great Master supervisor and also a mentor. Once again I would like to thank him for his stimulating discussions on my research, his availability and his help with my academic career. He has supported my Master journey in every aspect, with patience and kindness. I have been extraordinarily lucky to be supervised by him. I would also like to express my gratitude to all members of school of postgraduate studies at International University Management (IUM), for providing great advices on drafts and results and empirical doubts, and more generally for the kind encouragements throughout this journey. In addition, I have greatly benefited from the support and advices of the management of school of postgraduate studies at IUM, in particular Professor Peter Clement, whom I would like to thank.

The completion of my thesis has also been facilitated by the help of people during my fieldwork. I would especially like to thank the team of financial institutions provided important support during my research journey. I would also like in particular to thank Bank of Namibia, Standard Bank of Namibia, First National Bank of Namibia, Nedbank of Namibia and Bank Windhoek for making information available to me during my research journey.

Finally, “behind the scene”, I am indebted to friends and family, and in particular: Sylvia Schlettwein, Sidney Lulanga, Timoteus Sheepo and Joseph Ilonga, for being such stimulating MBA colleagues and friends; everyone at IUM, for providing me with academic support, and for their good company; my wife Johanna for gracefully supporting me throughout my research journey and tirelessly re-reading drafts of my academic; my children and relatives, for their unconditional love and support.

DEDICATION

“To my beloved wife Johanna and my children: Yamikani, Takondwa and Thokozani.”

May God Be Praised!!

ABBREVIATIONS

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ABSTRACT

EVALUATION OF FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN NAMIBIA

BY

Symon Nyalugwe

Under the supervision of Dr. Gift Kavari At International University of Management

The paper evaluates the financial performance of Namibia’s commercial banks using the CAMELS model for the period 2010 - 2015. The main objective of the study was to evaluate financial performance of commercial banks in Namibia by assessing capital adequacy, assets quality, management capability, earnings, liquidity and sensitivity to market risk. The overall performance evaluation indicated that First National Bank performed better in terms of capital adequacy than other three commercial banks. The lowest total capital ratio for FNB was recorded 16.24% in 2013 and it was above minimum standard of 8%. FNB performed slightly performed better than other three commercial banks in terms of capital level.

Asset growth performance indicated that Standard Bank’s non-performing loans were below 1% for period of six years which confirmed that Standard bank performed better in terms of non- performing loans than other three banks. However, it is important for the bank to avoid higher non-performing loans (NPLs) ratio, simply because it affects its profitability. The overall NPLs performance shows that standard bank is doing well than other three banks. It also indicated that FNB and Bank Windhoek were having highest amounts of NPLs in the period 2010 - 2015 while Standard bank had the lowest ratio below 1 percent that was recorded in the same period. The total assets of FNB grew to N$ 29.8 billion in 2015. Comparing with other commercial banks, FNB is performing better in terms of total assets and followed by Bank Windhoek which had N$ 28.6 billion of its total assets in 2015.

Management capability performance results indicated that high interest spread is an evident for Standard Bank and First National Bank. The two banks’ interest spread was recorded above 5% in 2015. It also specifies that Bank Windhoek used more borrowings to fund its assets than other three commercial banks. The results of the ratios show that debts leverage of Bank Windhoek was higher in 2014 and 2015. Standard Bank’s yield performance was higher by 9.29% in 2015 than previous years. The overall performance shows that Bank Windhoek recorded a strong performance in terms of the cost of funds than other three banks.

Profitability performance indicated that First National Bank performed better on the return on equity than other three banks during the period under study. The 2010 - 2015 performance shows that First National Bank recorded the strong performance on return on assets. It also shows that Standard Bank had a higher cost to income between 2010 and 2015. The cost to income ratio for Standard Bank has been above 25% for the period 2010 - 2013. It is advisable for the bank to record low ratio because it confirms the existence of efficiency.

FNB had more profits after tax between 2010 and 2015 than other three banks. The overall profit after tax shows that FNB produced the strongest performance in terms of profitability. It performs better than other three commercial banks. FNB profitability performance improved from N$ 459 million in 2010 to N$ 999 million in 2015. Nedbank had the highest net interest margin of 5.15% in 2010 and it reduced to 4.41% in 2015. FNB had a very high ratio of net interest margin of 5.16% in 2015. Bank Windhoek and Nedbank recorded the lowest NIM below 5% in 2015.

The liquidity performance shows that Standard Bank experienced high liquidity position than

other banks during the period under study. Standard Bank and FNB produced strong performance in terms of liquid assets compared to other two banks. The two banks held liquid assets of N$ 4 billion in 2015.

CHAPTER ONE Introduction and Background of the Study

1.0 Introduction

The study is based on the evaluation of financial performance of commercial banks that constitutes one of most important part of the banking sector of Namibia. The financial sector of Namibia is made up of two financial systems namely: formal and informal sectors. The formal financial sector is the banking sector while informal sector is for those participating in cash loan, moneylenders. The formal banking sector is composed of central bank, four commercial banks and developmental banks. Among all these financial institutions in Namibia, commercial banks are dominating and playing a major role than any other financial institutions in Namibia.

It is a well-known fact that banking sector is one of the most important sectors in Namibia’s economy and in other emerging/non-emerged economies in the world. The sector is very important because financial markets are unpredictable; therefore, banks are regarded as the key sources of funds for major businesses and to keep most of the investments of the firms. Namibian banks, especially commercial banks play key role to the community such as; allocation of funds for projects investments, mobilization of savings, monitoring and evaluating of borrowers.

Chowdhury and Ahmed (2009) pointed out that banking sector is a critical part of the economic system. Some business would almost be impossible without the availability of suitable banking services. Some of the services promoted by banks are such as savings, all people from all works of life, from the ordinary workers, the rich and businessmen, can keep their money safely in banks. “Secondly, banking promotes investments. Banks easily invest the money they get in industry, agriculture and trade. They either invest it directly or advance loans to other investors.

Thirdly, it is most through banks that foreign trade is carried on. Whether we export or import, it is through banks that money is transferred from one country to another” (Chowdhury & Ahmed, 2009, p. 137).

PriceWaterhouse Cooperation’s annual report (2014) stated that banks in general are continuing doing well regardless of some unforeseen predicaments. The report presented that there is a combined increase of 24.5% in headline earnings to R27.6 billion against the comparable period comes off the back of strong net interest income growth of 18.4%, solid non-interest income growth of 9.8% and impairment charges that have been reduced due to intense focus on provisioning levels in prior periods. This PWC annual report of 2014 reveals and converses the performance of all major commercial banks in South Africa of which three of them are operating in Namibia, namely; Standard Bank, First National Bank and Nedbank.

In many countries, banks are seen as private companies with a public intention. They create value for all stakeholders and maximize shareholder wealth subject to the constraints of risk, market competition, social , and the legal/regulatory framework. Since these are the primary objectives of every bank. The private nature of a bank is seen through profitability while the public nature of the banks highlight financial safety, social responsibility and soundness of their operations. Profitability is central for every bank, however safety and security is also vital for the survival for any financial system. Banks make a choice between the accomplishment of profitability needed to be achieved and the risks attached to it. Therefore, when evaluating the performance of commercial banks, the latter and the former need be taken into consideration to avoid misleading conclusions. For example, if a bank achieves loan growth and, consequently, higher profitability by involved in excessively risky lending, it may be vulnerable to high loan defaults that would hurt its earnings or even threaten its survival over time. This has evidently seen from some banks in Western Europe and northern America during the financial crisis of 2007 - 2009.

Nevertheless, Namibia was not spared from this financial crisis due to its affiliation to South African Rand that was hit hard several times by devaluation during the period of 2015-2016 and Bank of Namibia produced weaker performance in 2015. This financial crisis has weakened the financial sector.

1.1 Background of the Study

1.1.1 Commercial Banks

One of the responsibilities of commercial banks in Namibia is to offer financial services and loans to firms, individuals and the government. There are four commercial banks operating in Namibia, which are; Standard Bank of Namibia, First National Bank of Namibia, Nedbank of Namibia and Bank Windhoek. Just like anywhere in the world, Namibian commercial banks are entitled to allocate funds for investment projects and mobilize savings. Therefore, due to global crisis, it is imperative to evaluate financial performance of commercial banks in terms of stability and soundness in Namibia.

The Commercial bank sector in Namibia is regulated by Banks Institutions Act 2 of 1998. The Act concentrates on consolidation and amendment of laws pertaining to banking institutions. The Act mandates a person to conduct banking business controls supervises and regulates banking institution. These are some of the provisions included in the act and it was revisited in 2010. The Act 4 of 2010 encourages banks to comply with the international banking best practices.

Table 1.1: Commercials Banks and Regulation Act in Namibia

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The table 1.1 illustrates the composition of banking sector in Namibia. It presents the background and regulation act in which an individual bank operates.

1.2 Statement of the Problem

The banking sector in Namibia was also affected by current global financial crisis and the central bank of Namibia recently reported that it has produced weaker performance in 2015. The weak performance of South African Rand against major currencies has also contributed to the weakness of Namibian Dollar. This has contributed to high interest rates paid by commercial banks on loans borrowed from central bank. The interest rate on loans is increasing each year and has also affected personal loans. The financial crisis has made commercial banks in Namibia to indulge in excessively risky lending so that they can make more profit. But this activity has made some of the banks vulnerable to high loan defaults and thus affected their profitability. These banks are facing problem of how to strengthen their credit risk in order to minimize non-performing loans and did not diversify their income sources instead are depending on interest loans alone.

Therefore, due to all these crisis in the banking sector in Namibia there is a need of evaluating financial performance of commercial banks in Namibia. Having no enough previous studies focusing on evaluation of financial performance of commercial banks, there is a gap that needs to be filled and it is imperative that more studies need to be done in this area.

1.3 Main Purpose of the Study

The main objective of this study is to evaluate commercial banks’ financial performance during the period 2010 - 2015 based on the CAMELS model. The study explores factors that determine commercial banks’ financial performance in Namibia.

1.4 Research Objectives

The specific objectives of this study are as follows:

(a) To quantify the financial performance of the commercial banks in terms of Capital adequacy, assets quality, management capability, earnings, liquidity and sensitivity to market risk;
(b) To identify the financial indicators in terms of CAMELS;
(c) To compute financial ratios that explain the performance of commercial banks;
(d) To suggest ways that can help commercial banks not to indulged in excessive risky lending.

1.5 Research Question/s

(a) Do commercial banks have sufficient capital?
(b) Do commercial banks possess high quality assets?
(c) Do commercial banks follow sound management practices with undoubted management capabilities?
(d) Do commercial banks enjoy profitable operations with good earnings?
(e) Do commercial banks exhibit liquidity problems with insufficient liquid assets?

1.6 Research Hypothesis

(a) Hypothesis (H0): Commercial banks are well capitalised and have sufficient capital.

Null Hypothesis (H1): Commercial banks are not well capitalised and have insufficient Capital.

(b) Hypothesis (H0): Commercial banks have high quality assets.

Null Hypothesis (H1): Commercial banks do not have high quality assets.

(c) Hypothesis (H0): Commercial banks have sound management operations.

Null Hypothesis (H1): Commercial banks are facing management problems.

(d) Hypothesis Null Hypothesis

(e) Hypothesis Null Hypothesis

(H0): Commercial banks earn sufficient earnings and are profitable. (H1): Commercial banks are facing insufficient earnings and are not profitable.

(H0): Commercial banks are liquid and have high liquidity levels.

(H1): Commercial banks have liquidity problems with low liquidity levels.

1.7 Scope of the Study

The scope of this study is limited to four commercial banks operating in Namibia, namely; First National Bank, Standard Bank, Nedbank and Bank Windhoek.

1.8 Significance of the Study

Having experienced of global financial crisis in the period 2007 - 2009 (Murinde, 2009), this has been justified and proven beyond measure that regular evaluation of financial performance of commercial banks at both national and international level is very important. It is under this background that the study was taken to evaluate financial performance of commercial banks operating in Namibia. This study explores the financial performance of commercial banks and observes if they are doing well. Ginevicius and Podviezko (2011) pointed out that due to present crisis the need of assessment of commercial banks in terms of steadiness and soundness has become an important exercise. However, regardless of commercial banks ratings, this did not stop investors who invested in bank capital from losses during bank failures, as well not foreseeing bankruptcies of banks and financial firms.

The study findings may help the policy makers understand about the financial performance of these four commercial banks operating in Namibia and help them in making appropriate economic decisions. This can also help bank managers to take applicable actions that can strengthen the operations of their banks based on the findings. The study will add value to existing knowledge on elements accountable for bank’s performance. It defines measures and financial strategy needed to be taken by stakeholders.

1.9 Limitations of the Study

The study on the evaluation of financial performance of commercial banks in Namibia employed financial ratios. The financial analysis ratios evaluate the strength and weakness of these four commercial banks, but although in general ratios do not disclose the severity and the quality of its components, hence, in this study, they were improved on by using averages. The study is limited to a period of six years from 2010 to 2015. The study is grounded on data derived from the published annual financial reports from commercial banks operating in Namibia. Economic models specified could not be estimated due to insufficient data and time constraints. The study did not discuss the indicators of sensitivity to market risks.

In normal circumstances, published financial reports do not give a complete image of the activities and projections of commercial banks’ financial performance simply because not all important information is published for public consumption. Therefore, this becomes one of the challenges of measuring the impact of performance, since, not all published reports had non- performing assets over the designated period, but alternatively some variables were used such as loan loss provisions for non-performing assets to replace the missing variables.

1.10 Structure of the Study

The study is divided into five chapters and outlined as follows: Chapter one presents introduction and background study, which includes the statement of the problem, research objectives, research questions, the significance of the study as well as the limitations of the study. Chapter two presents theoretical and empirical literature review from other studies on performance of commercial banks. Chapter three describes the methodology of the study and includes all the financial indicators computed in order to assess the performance of banks. Chapter four provides the presentation of results, data analysis and the discussion of the findings. Chapter five presents the conclusions and policy implications of the study.

1.11 Definition of Key Terms

Key terms and phrase used in this study are defined and described as follows:

- Capital Adequacy Indicators: Capital adequacy ratio is the ratio which protects banks against excess leverage, insolvency and keeps them out of difficulty (Nikhat, 2014, p. 773). Capital adequacy indicators used to measure the amount of bank's capital expressed as a percentage of its risk weighted credit exposures.

- Asset Quality Indicators: The asset quality of a commercial bank is primarily evaluated on the basis of its ability to recover the outstanding loans and advances made in due time. Henceforth, percentage of classified loan to total loan granted is considered as the principal ratio for judging the quality of the assets.

- Management Capability Indicators: The management capability ratios are used to analyze commercial banks and are mainly focus on the costs other than interest. The management competency of commercial banks can be attributed to a number of variables, such as operating ratio, profit per employee, expenses per employee, and gross earning assets to total assets.

- Profitability Indicators: Sing and Dutta (2013) defined profitability as a technique to evaluate overall efficiency of an organization and as a function of certain ratios. The earning ability of any commercial bank can be assessed through a number of profitability indicators, such as net investment margin, return on assets, diversification ratio, net profit margin, earnings per share, return on capital employed.

- Liquidity Indicators: Liquidity indicates the ability of a commercial bank to meet its financial obligations in a timely and effective manner.

- Sensitivity to Market Risk: Sensitivity to market risk reflects the degree to which changes in interest rates, foreign exchange rates, commodity prices, or equity prices can adversely affect a commercial bank’s earnings or capital (Cornyn & Mays, 1997).

- Non-interest earning assets: These are assets that by their characteristics do not generate interest income for the bank. Generally speaking, a commercial bank would prefer to minimize such assets, which are primarily composed of cash and due from balances, premises and equipment, bank owned life insurance, intangibles and other assets.

- Interest Earning Assets: It is defined as an income producing investment that is owned by a commercial bank. Earning assets include stocks, bonds, income from rental property, certificates of deposit (CD) and other interest or dividend earning accounts or instruments.  Liquidity Assets: It is an asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally regarded in the same light as cash because their prices are relatively stable when they are sold on the open market.  Non-Performing Loans: It is defined as a sum of borrowed money from the bank by a client upon whom the debtor has not made his or her scheduled payments for at least 90 days. This loan is comprised of loans due and unpaid for longer than 90 days.

- Loans and Advances to Customers: It is a total amount of issued credits given to banks during the accounting period. Liquidity of the bank can be judged upon the amount of its total loans. Loans and advances to customers are measured at amortized cost using the effective interest method.

- Total Assets: Total assets refer to the total amount of assets owned by an entity. Assets are items of economic value, which are expended over time to yield a benefit for the shareholders. If the shareholder is a business, these assets are usually recorded in the accounting records and appear in the balance sheet of the business.

- Deposits from Customers: A customer deposit could be an amount paid by a customer to a company prior to the bank providing it services. In other words, the bank receives the money prior to earning it. The bank receiving the money has an obligation to provide the services to the customer or to return the money.

- Loan Loss Provisions: Loan loss provisions are calculated by adding provisions for credit losses, releases of provisions and recoveries, direct write-off of loans and advances and other loan loss provisions.

- Debt Securities issues: It is defined as an amount of money which the commercial bank owes to its clients. It can be represented by a loan note, bond, mortgage or other form stating repayment terms and, if applicable, interest requirements.

- Capital: Capital is a type of good that can be consumed now, but if consumption is deferred, an increased supply of consumable goods is likely to be available later. It was defined as: " The part of a man's stock which he expects to afford him revenue” (Smith, 1776, p. 229).  Net Interest Income: It is the difference between interest earned and interest paid, and is commonly tracked by banks and other financial institutions that lend money. As banks both pay interest (to other banks or to individuals with deposits at the bank) and earn it (from loans), interest is both an expense and a revenue stream.

- Operating Income: Operating income is the net income of a bank, not including the impact of any financial activity or taxes. Operating income is positioned as a subtotal on the income statement after all general and administrative expenses, and before interest income and expense.

- Operating Expense: It is any expense associated with the general, sales, and administrative functions of a bank. This expense is not associated with production activities. Operating expense or other operating (non-interest) expense consists of personnel expense, administrative and other operating expense, and depreciation and amortization.

- Profit after Tax: it is often a better assessment of what a commercial bank is really earning and hence can use in its operations than its total revenues. It is the net profit earned by the bank after deducting all expenses like interest, depreciation and tax. Profit after Tax can be fully used for declaration of dividends.

1.12 Summary

This chapter provided the introduction and discussed the background of the study, which was followed by the statement of the problem, the main purpose of the study including the research objectives and research questions. The chapter also presented the hypothesis and scope of the study; significance, limitations and structure of the study. In addition, this chapter also provided the definitions of key terms used in this study. The next chapter presents relevant literature reviewed in this study.

CHAPTER TWO Literature Review

2.0 Introduction

Literature review section of this study comprises of the literatures on evaluation of performance of commercial banks done by other studies. The dimensions of the evaluation of financial performance of commercial banks in this study is totally based on the following financial factors; profitability, liquidity, capital adequacy, asset quality, management capability and earnings. These are financial indicators that are already used by number studies, to measure financial performance using financial ratios. The study has used number of techniques already used by other studies to evaluate the performance of commercial banks. The study has also adopted the CAMELS (Capital adequacy, Asset quality, Management Capability, Earnings, Liquidity and Sensitivity to Market Risk) model to measure the performance of commercial banks (Singh & Dutta, 2013). The CAMELS model was proven to be viable and is internationally recognized. It also financial ratios to compute results.

Therefore, to determine how well an organization is doing, it is simply depend on its performance. In other words, setting some standards for performance measurement, comparing the performance of an organization in a certain period of time with respect to some established standards internal or industry wise and determining how well it has confirmed to those standards along with the reasons for that performance is broadly called performance evaluation (Uddin & Bristy, 2014, p. 2).

2.1 CAMELS Model

“The bank has been graded as a top class bank in the country through internationally accepted Capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk (CAMELS) rating” (Chowdhury & Ahmed, 2009, p. 89). The CAMELS model is an international banking rating model which is used by bank supervisory authorities to rate institutions according to six factors. Financial sector regulators use the CAMELS model to evaluate a bank’s level of risk and overall condition.

2.2 Performance of Banks

Ncube (2009) established that two broad approaches can be used to assess bank performance namely; the accounting approach, which makes use of financial ratios and econometrics techniques. The former approach uses financial ratios for evaluating bank performance. Bank’s profitability or performance Return on Assets (ROA) is examined through the ratio of net income to total asset (Gul et al.2011); (Syafri, 2012); (Obamuyi, 2013); (Ongore and kusa, 2013); (Fredric, 2014). “ROA examines the ability of the bank management to generate income by utilizing company assets at their disposal. In other words, it shows how efficiently the resources of the company are used to generate the income” (Ongore and Kusa, 2013, p.239).

Performance is the action of accomplishing a task, or function. Performance is made up of behavioral and outcome aspect. Borman and Motowidlo investigated performance as multi- dimensional and dynamic concept. Borman and Motowidlo study (as cited in Sabine & Michael, 2002). It has been pointed out that commercial bank performance evaluation is well studied and has established an increase of attention over the past years (Seaford & Zhu, 1999). The literature shows that there are number of empirical studies on commercial bank performance around the world that has been established (see Yeh, 1996; Webb, 2003; Lacewell, 2003; Halkos and Salamouris, 2004; Tarawneh, 2006).

It has been investigated also that performance evaluation is one of the most important aspects of banks because the goals of any bank is to make profits (Anyanwaokoro, 2005) there is no bank that can operate without making profit. Performance has also helped banks to determine their position at market place for competitive advantage. In many literatures, the profitability is used as a measure for bank performance based on the studies of; Kaushik and Lopez (1996), Staikouras and Wood (2004), Deger and Adem (2011), Samina and Ayub (2013). The performance of banks is measured in terms of ratios consistent with studies of Sagar and Rajesh (2008), although financial ratios are not affected by changes in price levels but are very useful in measuring performance. Several studies have also founded out that bank sector performance is influenced by the cost to income ratio, operating expenses, and ratio of equity to total assets (Oladele and Sulaiman, 2012 ; Ivey, Gropper, and Rutherford, 2005 ; Said and Tumin, 2011; Shipho and Olweny, 2011).

Ifeacho and Ngalawa (2014) observed the correct quantity of liquid assets, enhancing capital bases, decreasing functional expenses, improving the quality of assets and using diversifying revenue sources increase the profitability of commercial banks. Tarawneh (2006) investigated performance of Oman commercial banks using financial ratios and ranked the banks based on their performance. Samad (2004) examined performance of banks in Gulf during the period 1994 -2001 by using financial ratios; credit quality, profitability and liquidity performances.

Kiyota (2009) studied the profit efficiency and cost efficiency of commercial banks functioning in 29 sub-Saharan African countries during 2000 - 2007. Kirkpatrick et al (2007) used a sample 14 of 89 banks from sub-Sahara African countries for the period 1992 - 1999 and establishes that banks are on average 67% profit frontier profit efficient and 80% cost efficient, as indicated by the results from both the distribution free approach. Ncube (2009) used the stochastic frontier model on four large and four small banks in South Africa to establish that South Africa banks have significantly improved their cost efficiencies between 2000 and 2005 with the most cost efficient banks also being most profit efficient banks also being most profit efficient. The study done during the period of 2005-2009 using financial ratio analysis measured, defined and analyzed the performance of commercial banks in South Africa.

Hempel et al, (1994) and Dietrich (1996) pointed out that financial ratios can be used to recognize a bank’s specific strengths and weakness as well as providing detailed information about bank profitability, liquidity and credit quality policies. The major studies of performance of commercial done in South Africa were based on branch’s performance [see Oberholzer and Van der Westhuizen (2004); O’Donnell and Van der Westhuizen, (2002); Okeahalam (2006)]. More recently, Cronje (2007) and Ncube (2009) studied the efficiency of South African banks using Data Envelopment Analysis (hereafter DEA), studying the period of 1997-2007 and 2000- 2005 respectively.

O’Donnell and Van der Westhuizen (2002) examined the efficiency of a South African bank at branch level. The main attention was given to the investigation of branches that were performing better than others. Some of these banks are among four commercial banks operating in Namibia.

2.3 Importance of Banks Performance

Uddin and Bristy (2014) examined that an economy of a country may come to a standstill without these banking activities. Just as without heart the existence of any human being can’t be thought, economic activities without the help of banking system is unthinkable. Cornetta (2009) pointed out that state-owned banks operated less profitably, held less core capital, and had greater credit risk than privately-owned banks prior to 2001, and the performance differences are more significant in those countries with greater government involvement and political corruption in the banking system. Alkhatib (2012) supported that the banking sector is considered to be an important source of financing for most businesses.

There is a common assumption saying the increasing of financial performance leads to improved functions and activities of the organizations. Sangmi and Nazir (2010) observed that sound financial health of a bank is the guarantee not only to its depositors but is equally significant for the shareholders, employees and whole economy as well. As a sequel to this maxim, efforts have been made from time to time, to measure the financial position of each bank and manage it efficiently and effectively.

Kumbirai and Webb (2010) noted that the consistent performance ensured by a prolonged economic expansion, supported by prudent economic policies and improving macroeconomic fundamentals resulted in low inflation, high commodity prices and increased investor confidence. In such favourable economic conditions, the banking sector played an essential role in the economic growth of the country. Ifeacho and Ngalawa (2014) stated how the quality of bank’s asset can be used to evaluate the performance of the bank. The asset quality can be used to measure the component of non-performing assets as a percentage of total assets.

Uddin and Bristy (2014) stated that the performance for every bank depends on the service quality provided to the customers. It was conclude that evaluation of bank’s performance from time to time helps to know how well customers are satisfied. Ifeacho and Ngalawa (2014) examined that there are statistical techniques that can be used to analyze bank’s performance.

The traditional approach for evaluating bank performance is the financial ratios analysis.

However, there is no combination of financial ratios for a complete and satisfactory evaluation of bank operations efficiency. In consequence, financial ratio analyses are complemented with different bank quality evaluations such as equity structure and management quality.

2.4 Factors affecting Bank’s Performance

Many studies have shown that business cycles significantly affect bank performance ,for example (Al-Tamimi, 2010) ; (Athanasoglou et al., 2005) ; ( Heffernan and Fu, 2008). Since firms’ and households’ ability to service their debt plays an important role in ensuring bank stability, bank performance is expected to follow a pro -cyclical pattern. Supporting this hypothesis, Naceur and Kandil (2009) maintain that factors that adversely affect bank profitability arise from the deterioration of economic activity (Ifeacho and Ngalawa, 2014). The performance evaluation of banks has thus taken high priority in the context of Bangladesh (Siddique and Islam, 2001). Performance evaluation is very important for the bank to know its position (Uddin and Bristy, 2014). Ho and Zhu (2004) measured the performance of forty-one banks in Taiwan using an inventive two-stage data analysis model that separated efficiency and effectiveness of performance banks.

2.5 Consequences of poor Performances of Banks

In numerous of the examination of number of studies the authors concluded that better efficiency does not always mean better effectiveness simply because they didn’t find any seeming correlation between these two indicators. Banks that do not perform evaluatation are likely to fall into a trap of not knowing whether the bank is making profit or not. Adegbie and Fakile (2013) observed Nigerian banks between the period of 1990 to 2005 and found out that most of distressed commercial banks in Nigeria were liquidated, resulting to loss of depositors holding, job losses by workers, and adverse effect on other sectors of the economy. Athanasoglou et al. (2006) applied the dynamic model with the panel data for the study of performance of Greek banks for the period “1985 - 2001”.

The results of the study done Greece showed that the performance of banks depends on internal factors of banks-capital, credit risk, (expressed as the ratio between reserves for losses on loans loans), productivity, cost management and the size of banks; from specific factors of industry-the ownership and concentration, and the macroeconomic factors-expected inflation and production cycle. Falilat (2013) concluded that a bank can achieve its goal and objectives of long -term profitability by developing good market plan and strategy.

2.6 Domestic, State Owned And Foreign Banks

However, in finding about the performance of the commercial banks, the study makes a difference between the domestic banks foreign banks. Not to say, it would be unfair to give a similar treatment to these two different entities. Mpuga (2002) establishes factors responsible for poor performance of domestic commercial banks in Uganda. Birungi (2005) analyzed causes of continuous large interest rate spreads in Uganda, while Egesa and Abuka (2006) analyzed total factor productivity change among bank and its determinants with the main objective of investing the pattern of total factor productivity in Uganda during liberalization of the financial sector. Cornetta (2000) investigated whether the performance of state-owned banks is inferior to that of privately-owned banks as suggested by both Shleifer and Vishny (1997) , whether the changing performance of state owned banks is relative to privately-owned banks fits Kane’s life-cycle theory of a regulation-induced banking crisis.

Berger and Humphrey (1997) suggested that the purpose of evaluating the performance of the banks is to separate good performing banks from poor performing ones. Frederick (2014) studied the factors that determine performance of domestic commercial banks in Uganda. His paper used 18 linear multiple regression analysis over the period 2000 - 2011 to analyze data of all licensed domestic and foreign commercial banks. The study found that, management efficiency; asset quality; interest income; capital adequacy and inflation contribute on the bank’s performance in Uganda.

The studies of Bategeka and Okumu (2010) focused on banking sector liberalization in Uganda, process, results and policy options. The results indicated that some local banks performed better than foreign banks in providing services to small and medium-sized enterprises and low-income rural households. Foreign banks had a tendency of “cheery picking” the most lucrative bank transactions and provided bank services to a niche market consisting of big corporations and high income households located in urban area , thus affecting performance of domestic commercial banks in Uganda.

In addition, studies of Bategeka and Okumu (2010) indicated that foreign banks never passed on management skills and knowledge to the local banking systems, which performed relatively poorly compared to foreign commercial banks. Using the previous studies of Mpuga (2002) Matama (2008) ; Mugume (2010) and Bategeka and Okumu (2010) as a background, this study focuses on underlying key factors that have had impact on the performance of domestic commercial banks in Uganda over the period 2000 - 2011.

2.7 Empirical Literature Review

There are a number of studies that have examined the performance of commercial banks. Most of these studies are using financial indicators to measure performance of banks. These empirical studies have also established a number of factors that contribute to the performance of commercial banks. Some say that the impact of growing bank’s size on profitability can be positive up to a certain limit, beyond which the impact becomes negative on profitability (Eichengreen and Gibson, 2001). Diversification through non-interest income enhances bank profitability (Chiorazzo et al., 2008).

Nevertheless, other studies by; Acharya et al., (2001) ; Morgan and Katherine (2003); De- Young and Rice (2004) indicated that greater variation of the bank dealings does not necessarily transform into increased bank profitability, but may instead reduce profits, therefore best level of non-interest income activities must be set. Some studies pointed out that the impact of inflation on bank profitability depends on whether inflation has been fully and correctly predicted by bank manager (Perry, 1992).

Matama (2008) focused on corporate governance and financial performance of selected commercial banks in Uganda. The results from the study indicated that corporate governance account for 34.5% of the general financial performance variance with openness and reliability as significant contributors. In addition Matama (2008) indicated that the poor performance of domestic commercial banks in comparison with foreign commercial banks was linked to self- inflicting causes from ownership, although he never mentioned the self-inflicting causes.

Nanyonjo (2002) measured the impact of the structure of Uganda’s banking sector and on profitability during the period of 1993 -1999. The work of Nanyonjo was extended by Mugume (2010) by examining the market structure and performance in Uganda banking industry, purposely to discover the relative strength of market power and effectiveness in explanation of banks’ profitability. His findings specified that market power and concentration had a positive effect on profitability of commercial banks in Uganda. Kaushik and Lopez (1996) studied that bank‘s performance measure of profitability is used as a proxy for bank performance, it was supported by the studies of; Staikouras and Wood (2004), Deger and Adem (2011), Samina and Ayub (2013). To some bank performance is measured in terms of ratios consistent such as the studies conducted by; Sagar and Rajesh (2008), simply because ratios are not affected by changes in price levels, hence, useful in this type of study.

2.8 Models used in Other Empirical Studies

(a) Sharma’s study 2014

Sharma (2014). Studied the performance of Indian commercial banks, during the period 2009 - 2012; and the following model was specified.

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The dependent variable is return on assets (ROA), and independent variables are liquidity (LQ), profitability (PR), efficiency (EF), asset quality (AQ) and capital adequacy (CA).

Findings

Sharma (2014) results of the analysis of financial parameters in the study revealed that return on assets ratio is positively related to liquidity, profitability and capital adequacy ratio while it is negatively related to the asset quality variable.

(b) Nzewi’s study 2015

Nzewi & Ojiagu (2015). Studied the performance of Commercial Banks in Nigeria, during the period 2011 - 2013; and the following model was specified.

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Findings

Nzewi & Ojiagu (2015) uses Profit after tax (PAT) to measure the profitability performance of selected commercial banks in the financial sector. β1 represents the parameter estimated and the slope of the model. Total Asset (TA) represents the independent variable. Ut (error term) measures the profitability of statistical error encounter. The empirical finding confirmed that there was a weak nexus between total assets and profit after tax.

(c) Çekrezi’s study 2015

Çekrezi (2015) studied the factors affecting performance of commercial banks in Albania, during the period 2010 - 2013; and the following model was specified.

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The dependent variable is return on assets (ROA), and independent variables are Size (SZ), Capital adequacy (CAP), liquidity (LQ) and Age (AGE).

Findings

Çekrezi (2015) results of his suggested that SIZE has a positive but not significant relation with ROA. This result shows that the size of the bank has not a very strong impact on profitability and we are not able to say that larger banks achieve a higher return on assets. Frederic (2014) also measure the same results as those founded in the study of; Çekrezi, A. (2015). This results is not consistent with the findings of Gul et al. (2011) which found a significant positive relation of size with ROA and with the studies of Syafri (2012) and Obamuyi (2013) which found a significant negative relation of size with ROA.

It has been founded that capital adequacy has a negative and significant impact on the profitability of the bank and this result is supported by the study done of; Frederic (2014), but it was not the same as those founded by other previous researches (Syafri, 2012; Obamuyi, 2013; Ongore and Kusa, 2013). The result shows that CAP has a strong negative impact on profitability of banks. This indicates that with more equity the chances of return on assets will be lower. Liquidity has a negative and significant influence on profitability, which is not consistent with the study of Gul et al. (2011). It shows that the increase of loans with reduce the profitability of banks. Age is the last factor examined and its coefficient resulted positive, but not significant to determine bank’s profitability. So the growing in age of banks doesn’t influence on their profitability.

(d) Malhotra, Poteau & Singh’s Study 2011

Malhotra, Poteau. & Singh (2011). Evaluating the performance of commercial banks in India, during the period 2005 - 2009; and the following model was specified.

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The dependent variable is return on assets (ROA), and independent variables are Size (SZ), Credit Risk (CR), Operational Efficiency (OE), and Asset Management (AM).

(e) Frederick’s study 2014

Frederick (2014). Factors Affecting Performance of Commercial Banks in Uganda a Case for Domestic Commercial Banks, during the period 2000-2011 and following model specified:

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The dependent variable is return on assets (ROA), and independent variables are equity capital

(EA), loan loss provisions (LLTL), net interest margin (NTMTA), operating cost (OPEXTI) and cost consumer price index (CPI).

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The dependent variable is return on equity (ROE), and independent variables are equity capital

(EA), loan loss provisions (LLTL), net interest margin (NTMTA), operating cost (OPEXTI) and cost consumer price Index (CPI).

Findings

Frederick (2014) results are consistent with the findings of Oladele et al. (2012), who studied the determinants of bank performance in Nigeria. It denotes that poor expenses management is among the main contributors to poor performance; therefore, efficient cost management is a prerequisite to improving profitability of domestic commercial banks in Uganda. On the other hand, Net interest margin had the greatest positive significant impact on bank performance for domestic commercial banks over the period. The study indicates that domestic commercial banks in Uganda significantly rely on traditional banks activities.

Capital adequacy (EA) has a negative impact on performance of domestic commercial banks in Uganda which is statistically significant contrary to expectations. The result suggests that a higher capital ratio leads to or predicts lower profitability, consistent with the findings of Hoffmann (2011), who found a negative impact of capital- assets ratio among US banking sector over the period 1995 - 2007. The implication of the results from Ugandan commercial banks‟ perspective is that, domestic commercial banks in Uganda operated over- cautiously to avoid eating into regulatory capital, thus ignoring potential profitable opportunities over the period.

Loan loss provision to total loan (LLPTL) has a significant negative coefficient, consistent with the findings of Ongore and Kusa (2013); Samina and Ayub (2013); Trujillo-Ponce (2012); Davydenko, (2011), and Sufian (2010), who found that, asset quality had a significant negative impact on financial bank performance measured by ROA. The results point out that credit risk has a significant negative impact on bank profitability for domestic commercial banks over the period. The implication is that poor quality of loans led to increased loan loss provisions, thus reducing bank profits. Net interest margin to total assets has a positive and statistically significant impact on returns on assets for domestic commercial banks in Uganda.

The results Frederick (2014) are also related to the findings of Burki and Niazi (2006), who indicated that, there was a relationship between interest income and earning assets for foreign commercial banks in Pakistan. On the side of external factors, inflation measured as CPI, has a significant positive impact on ROA. The results were consistent with the findings of; Davydenko (2011) ; Sehrish et al.; Kasman et al. (2010); Alexiou and Sofoklis (2009) who indicated a positive impact of inflation on bank performance. The results suggest that, domestic commercial banks predicted inflation correctly which enabled them to adjust accordingly to earn more profit.

CHAPTER THREE Research Methodology

3.0 Introduction

Chapter three discusses the research methodology and model that has been adopted to address the main research objectives of this study. The chapter explains the research design and describes the target population from which data of the study was drawn. The methodology section has also employed financial indicators to compute data that will follow in this study. It also adopted CAMEL Model (see literature review 2.1) to evaluate commercial banks’ level of financial performance. As the study is quantitative in nature, it also involves the use of financial ratios to quantify the performance of commercial banks operating in Namibia.

In addition, this section discusses the data collection and techniques that will follow in this study. It is explorative in its nature and entrenched in ontological philosophy seeking to establish the truth on financial performance of commercial banks in Namibia. Further, the study utilized adductive approach that examined and extracted secondary data from available commercial banks annual financial reports from 2010-2015.

3.1 Research Design

A research design is a structure of an evaluation that is conceived to obtain answers to research questions constitutes the blue print for collection, measurement and analysis of data. The research design used included all the procedures that were selected to answer a particular research question in this study. There are basically three types of research designs, namely; quantitative, qualitative and mixed. This study adopted quantitative methodology to quantify numerical data collected from commercial banks’ financial reports. The study has also adopted CAMELS Model to evaluate commercial banks using financial indicators.

3.2 Population of the Study

It is aggregation of elements from which the sample is actually selected (Babbie, 2007). The study population for this study was taken from four commercial banks operating in Namibia.

3.3 Sample and Sampling Techniques

There are four types of banks operating in Namibia; central, commercial, development and saving banks and out of these only commercial bank has been taken in this study. The study used quota sampling techniques to obtain the research sample from the formal banking sector operating in Namibia. In practice this technique decided to pick four commercial banks operating in Namibia on which a quota is based on. It focused on four commercial banks’ financial annual reports from 2010-2015. The secondary data obtained has been collected for 10 years from the period 2010 to 2015. Since the secondary data has been collected on financial indicators of commercial banks, hence only four commercial banks operating in Namibia during the above period are the population of the study.

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Figure 3.1: Sampling of Commercial Banks

3.4 Data Collection

Nedbank of Namibia Windhoek Bank

The study used secondary data and was collected from commercial banks’ financial reports to study the relationship of financial indicators with the performance of four commercial banks. It was computed using financial ratios that will follow in this study.

3.5 Reliability and Validity

3.5.1 Reliability

It is the degree of consistency with which a tool measures the attribute it is designed to measure. In order to ensure the reliability of the results, the researcher used secondary data that provided a higher quality and authentic source of information to make this study valid and reliable. The study used commercial banks’ annual reports from 2010-2015.

3.5.2 Validity

To ensure the content validity of the research was based on information gathered during literature review and the study also used well recognized CAMEL Model, which is internationally recognized and is used by managers to evaluate a banks’ level of risk and financial performance. However, the study also computed data using financial ratios.

3.6 Definition of Variables

3.6.1 Capital Adequacy Indicators

Table 3.1: Capital Adequacy Indicators

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3.6.2 Assets Growth Indicators

Table 3.2: Assets Growth Indicators

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3.6.3 Management Capability Indicators

Table 3.3: Management Capability Indicators

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3.6.4 Profitability Indicators

Table 3.4: Profitability Indicators

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3.6.5 Liquidity Indicators

Table 3.5: Liquidity Indicators

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3.7 Summary

This chapter discussed the research design, population of the study, sample and sampling techniques of study. In addition, the chapter discussed data collection techniques and procedures, data reliability and validity. The next chapter presents the results and analysis of this study.

CHAPTER FOUR Presentation of Results and Data Analysis

4.0 Assessment of Banks’ Performance in terms of Financial Indicators

This chapter presents computed data results for the assessment of commercial banks’ performance. The indicators were used to assess bank’s growth in a period between 2010 and 2015 and the findings are discussed in the tables below.

Table 4.1: Financial Performance of Standard Bank of Namibia

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Source: Own Computation; various banks’ annual reports

Table 4.1 above presents the financial growth of Standard Bank between year 2010 and 2015. It shows that Standard Bank’s profit after tax increased by 67% in 2015 and operating expenses increased by 85%. While loans and advances to customers increased by 100% and total assets increased by 68%.

Table 4.2: Financial Performance of First National Bank of Namibia

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Source: Own Computation; various banks’ annual reports

Table 4.2 above illustrates the financial growth of First National Bank between year 2010 and 2015. It shows that First National Bank’s profit after tax increased by 118% and operating expenses increased by 68%. However, loans and advances to customers increased with 101% and total assets increased by 87%.

Table 4.3: Financial Performance of Nedbank of Namibia

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Source: Own Computation; various banks’ annual reports

Table 4.3 above presents the financial growth of Nedbank of Namibia between year 2010 and 2015. It shows that Nedbank’s profit after tax increased by 91% and operating expenses increased by 51%. However, loans and advances to customers increased with 90% and total assets increased by 93%.

Table 4.4: Financial Performance of Bank Windhoek

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Source: Own Computation various Banks’ Annual reports.

Table 4.4 above illustrates the financial growth of Bank Windhoek between year 2010 and 2015. It shows that Bank Windhoek’s profit after tax increased by 168% and operating expenses increased by 51%. However, loans and advances to customers increased with 109% and total assets increased by 98%.

4.1 Capital Adequacy Performance

The increase of ratio of capital adequacy causes higher profitability and profit gained can be provided as loans. However, there is a minimum percentage that has been developed for capital adequacy ratio to ensure that banks can absorb a reasonable level of losses before becoming insolvent. The minimum capital adequacy ratios percentages are:

- Tier one capital to total risk weighted credit exposures must not be less than 4 percent;  Total capital (tier one plus tier two less certain deductions) to total risk weighted credit must not be less than 8 percent.

Table 4.5: Total Capital Ratio

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TCR is measured as: Total Capital / Total Risk Weighted Assets

The above table presents total capital ratio data computed for four commercial banks operating in Namibia between year 2010 and 2015. Total capital ratio defines the total capital that a commercial bank holds to protect itself from losses due to risk from underperforming loans. In the table above, it shows that in the period of 2010 and 2011, first national bank had a high total capital compare to other three banks. The total capital of First national bank was 20.42% in 2010 and 17.20% in 2011, while in 2012; it shows that Nedbank had a high total capital to compare to other three commercial banks. The total capital of Nedbank in 2012 was 18.42%.

The overall performance of the commercial banks shows that First National Bank was better in 35 terms of capital than other three commercial banks. The lowest total capital adequacy for FNB was 16.24% which is above 8% minimum standard and it was in 2013.

4.2 Assets Growth Performance

Table 4.6: Non-Performing Loans to Total Loans

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NPLTL is measured as: Non-performing loans / Total Loans

To compare performance between commercial banks is determined by quality of their loan portfolio as it is identified by the level of bad loans. Two difference measures were used to evaluate bad loans, the ratio of non-performing loans to total loans and the ratio of loans loss provisions to total loans. The NPLs to total loans are loans due and unpaid for longer than 90 days and are compared to total loans. The table 4.6 shows that FNB had a highest ratio of non- performing loan in 2010 which was 2.44% and in 2011; it decreased with 1.13% from 2.44% to 1.31%. However, Standard Bank’s non-performing loans results are below 1% for all six years which means that Standard bank was better in terms of Non-Performing Loans than other three banks. The bank needs to avoid higher NPL ratio because it can bring more problems to the bank.

4.3 Management Capability Performance

Table 4.7: Interest Spread

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IS is measured as: (Interest Earned - Interest Expenses) / Total Assets

The above table presents interest spread computed data for four commercial banks operating in Namibia between year 2010 and 2015. Interest spread is the difference between the average lending rate and the average borrowing rate for a bank. It is the difference between interest earned and interest expended is one measure of the cost of intermediation. The higher difference between interest earned and interest expended points to a lower cost of intermediation and lower difference will point to a higher cost of intermediation.

Interest expended as a percentage of interest earned is another measure of the cost of obtaining the funds needed for lending purposes. A high ratio is an indication that bank finds it difficult to attract low cost deposits and the bank is spending more on interest paid to clients than what bank gain from interest paid by clients. In 2010, Nedbank shows a higher percentage of 5.15% while in 2015; First National Bank recorded 5.16 % higher than other banks. High interest spread is evident for Standard Bank and First National Bank, which was above 5% in 2015. The spread was below 5% for both Nedbank and Bank Windhoek.

Table 4.8: Debt Leverage

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DL is measured as: Total debt/ Owners’ funds

The above table presents debts leverage computed data for four commercial banks operating in Namibia between year 2010 and 2015. Debts leverage implies that commercial banks have a lower equity base and usually use borrowings to fund as their assets. In the table above, it shows that Bank Windhoek use more borrowings to fund its assets than other three commercial banks. The ratios above show that debts leverage of Bank Windhoek was higher in 2014 and 2015. The year 2014 recorded debt leverage of 0.60, while in 2015, it increased from 0.60 in 2014 to 0.68 in 2015 with 0.08.

4.4 Profitability Performance

Table 4.9: Return on Assets

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ROA is measured as: Net Income / Total Assets

The above table presents return on assets computed data for four commercial banks operating in

Namibia between year 2010 and 2015. ROA ratio demonstrates the ability of helping management to attain deposits at a sensible cost and invest them in profitable investments. It indicates how much net income is generated per N$ of assets. However, if ROA is higher in that year then there is more profit for the bank. The table above shows that Standard bank had a higher ratio in 2010. The Standard bank’s 2010 rate was 2.99 %, while First National Bank rate in 2011 was 3.14%. The 2010 - 2015 performance shows that First National Bank recorded strong performance on return on assets.

Table 4.10: Return on Equity

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ROE is measured as: Net Income / Shareholder's Equity

The above table presents return on equity computed data for four commercial banks operating in Namibia between year 2010 and 2015. ROE ratio measures performance of a particular commercial bank's profitability by revealing how much profit a bank generates with the money shareholders have invested. It indicates the bank’s profitability and growth potential. It provides the rate of return to shareholders or the percentage return on each N$ of equity invested in the bank. When percentage is higher it is better for the shareholders. However, when ROE is much high than ROA then there is limited of borrowings by the bank. The table above shows that Standard Bank had high percentage of ROE than other three banks. In 2010, standard bank had 29.45% rate of ROE higher than other three banks, while First National Bank had 27.14% in 39 2011, 32.39% in 2012 and 29.47% in 2015 than higher than all other three banks. Based on the return on equity, First National Bank performed better than other banks during the period under study.

Table 4.11: Cost to Income

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CI is measured as: Total Cost / Total Income

The above table presents Cost to Income computed data for four commercial banks operating in Namibia between 2010 and 2015. Cost to Income measures the income generated per N$ (Namibian Dollar) by commercial banks in Namibia. It evaluates the cost that the bank input in order to produce a unit of output. It shows a particular bank's costs in relation to its income. In the table above shows that Standard Bank had a higher cost to income between 2010 and 2015. The average cost to income for Standard Bank has been above 25% for the period 2010 until 2013. When the ratio is lower it is better for the bank in terms of efficiency.

4.5 Liquidity Performance

Table 4.12: Liquid Assets to Deposits

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LAD is measured as: Liquid Asset / Deposits.

The above table presents Liquid Assets to Deposits computed data for four commercial banks operating in Namibia between 2010 and 2015. The liquidity in a bank is like life in human body. A commercial bank should be at all cost in a position to meet its obligations when demand arises. It is important to have a mixture of liquid and non-liquid asset. Liquid asset can be converted into cash quickly and with minimal impact to the price received.

Liquid asset is regarded as cash because its prices are relatively stable when it is sold on the open market and it is good for short term borrowings. But the higher liquidity may also mean higher risk undertaken from the bank and it may decrease profit. In the table above shows that First National Bank had better liquidity position in 2010 than other three banks, with 27.02 %. But the overall assessment shows that Standard bank experienced high liquidity position than other banks during the period under study.

CHAPTER FIVE Summary of Findings, Conclusions And Recommendations

5.0 Introduction

In this chapter the summary of findings from the data analysis and are presented using graphical presentations. This section discusses the summary of findings, conclusions derived from the study, recommendation and suggestions of further study.

5.1 Summary of Findings

5.1.1 Capital Adequacy Performance

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Figure 5.1: Total Capital Amount

The graphs above show that FNB performed better in the period 2010 - 2015. It had the highest total capital of N$ 3.7 billion. Its lowest total capital of N$ 1.9 billion was recorded in 2011. The results show that FNB performed better than other three commercial banks in terms of capital level.

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Figure 5.2: Total capital Ratios

The Graphs above illustrate that FNB total capital ratio was 20% higher than all other three commercial banks. Its lowest total capital was 16.24% and was recorded in 2013. It decreased from 17.67% in 2012 to 16.24% in 2013, with 1.43%. The least performing bank in terms of total capital ratio in this period was Bank Windhoek.

Table 5.1: Total Capital (N$’000)

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5.1.2 Assets Growth Performance

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Figure 5.3: Non-Performing Loans Amount

The graphs above show that FNB had a highest amount of Non-Performing Loans (NPL) of N$ 279 million in 2010, while Bank Windhoek had the highest NPL in 2011 amounted to N$ 193 million. The overall performance in terms of Non-Performing Loans shows that FNB and Bank Windhoek were having highest amounts of NPL in this period.

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Figure 5.4: Non-Performing Loans Ratios

The graphs above show that Standard Bank had the lowest NPL ratio in the period 2010 - 2015. Its NPL was below 1 percent, while FNB had the highest NPL recorded in 2010 that was 2.44%. The overall NPL performance shows that standard bank was doing well than other three banks in this period.

Table 5.2: Non-Performing Loans (N$‘000)

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Non-performing loans have fluctuated over the past six years in all four commercial banks. The overall performance in terms of NPL shows that FNB and Bank Windhoek were having highest amounts of NPL in the period 2010 - 2015 while Standard Bank had the lowest ratio that was recorded below 1 percent for the period of six years.

5.1.3 Management Capability Performance

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Figure 5.5: Total Assets Amount

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The graphs above illustrate that FNB had a highest total assets in both 2010 and 2011. In 2010, FNB recorded N$ 15.9 billion total assets and grew by 0.26 percent in 2011 to N$ 17.2 billion. The overall total assets performance for all commercial banks from 2010 to 2015, show that FNB had more assets than other three commercial banks.

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Figure 5.6: Total Assets Ratios

A low yield on earning assets means that a bank is earning less on its loans. The yield on earning assets for Bank Windhoek was the highest in 2010 which confirmed strong performance than other three banks. Standard Bank produced strong yield performance in 2015 with 9.29% higher than the previous year.

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Figure 5.7: Cost of Fund Ratios

Bank Windhoek paid the highest interest rate of 5.43% on deposits in 2010, while Nedbank paid the lowest rate of interest of 3.80% in the same year. The overall picture shows that Bank

Windhoek recorded the highest cost of funds than other three commercial banks.

Table 5.3: Total Assets (N$’000)

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The table above shows the total assets of FNB grew to N$ 29.8 billion in 2015. To compare with other three commercial banks, FNB recorded strong performance in this period in terms of total assets and was followed by Bank Windhoek, which recorded N$ 28.6 billion in total assets.

5.1.4 Profitability Performance

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Figure 5.8: Profit after Tax Amount

Table 5.4: Profit after Tax (N$‘000)

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The table above shows that FNB had more profits after tax between 2010 and 2015 than other three commercial banks. The overall profit after tax analysis shows that FNB produced the strongest performance in terms of profitability better than other three commercial banks. FNB profitability performance improved from N$ 459 million in 2010 to N$ 999 million in 2015.

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Figure 5.9: Net Interest Margin Ratios

Net interest margin (NIM) is a measure of the difference between the interest income generated by banks and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. NIM of less than 3% is generally considered low for commercial bank and more than 5% is very high. However, the graphs above presented that Nedbank had the highest net interest margin of 5.15% in 2010 and reduced to 4.41% in 2015. FNB recorded a very high net interest margin of 5.16% in 2015. Bank Windhoek and Nedbank recorded the lowest NIM, which below 5% in 2015.

5.1.5 Liquidity Performance

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Figure 5.10: Liquid Assets Amount

Liquid assets are generally regarded in the same light as cash because their prices are relatively stable when they are sold on the open market. This is cash equivalents and others (liquid assets) owned by a bank that can be easily converted into cash (liquidated). The graphs above show that Standard Bank and FNB produced strong performance in terms of liquid assets compared to other two banks during the period 2010 - 2015. The two banks had liquid assets of N$ 4 billion and above in 2015.

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Figure 5.11: Liquid Assets to Total Assets Ratio

Table 5.5: Liquid Assets (N$’000)

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The table above shows that FNB produced strong performance in terms of liquid assets followed by standard Bank in this period. Nedbank was the lowest performer in 2010 with liquid assets of N$ 642 million, while Bank Windhoek was the lowest performer in 2015 with liquid assets of N$ 720 million.

5.2 Conclusions

The study revealed that financial sector of Namibia is made up of two financial systems namely: formal and informal sectors. The formal financial sector is the banking sector while informal sector is for those participating in cash loan and money lenders. The formal banking sector is composed of central bank, four commercial banks and developmental banks. Among all these financial institutions in Namibia, commercial banks are dominating and playing a major role.

The analysis from the findings has also revealed that all four commercial banks are financially doing well and have adopted prudent policies of financial management. Based on this analysis, the results show that commercial banks in Namibia are playing a major role to materialize most of the financial services happening throughout Namibia. Therefore, they ensure better services from their part and proved to handle all sorts of internal and external pressures skillfully.

However, the financial performance evaluation conducted in this study can help both banks and its stakeholders to assess the availability of the bank’s policies and operations in monetary terms. So far as results and findings are concerned all four commercial banks have shown significant performance in different areas and are performing above the regulated standard, although among themselves some are much better performer than the others.

5.3 Recommendation

Based on the findings, it has been recommended that commercial banks in Namibia should engage themselves in following:

1. Explore other activities that could help them to reduce operational costs.
2. They need to diversify income sources in order not to depend on interest loans alone.
3. To strengthen credit risk management in order to minimize non-performing loans and loan loss provisions.
4. To initiate new products and services that better than indulging in lending risk loans.

5.4 Suggestions of Further study

The need for future evaluation of financial performance of all banks in Namibia and also banks in Southern Africa is strongly recommended. More variables that cover all aspects of the banking sector need to be addressed in further evaluation. More econometric models need to be applied and run data regressions for at least 20 years period. The econometric models specified in the literature review (2.8) have to be estimated. More indicators presented in the appendix should be added to strengthen the results of determining the best performing banks.

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APPENDIX-A

Capital Adequacy Performance (N$’000)

Standard Bank

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

First National Bank

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

Nedbank

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

Bank Windhoek

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

Assets Growth Performance (N$’000)

Standard Bank of Namibia

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

First National Bank of Namibia

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

Nedbank of Namibia

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

Bank Windhoek

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

Management Capability Performance (N$’000)

Standard Bank of Namibia

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

First National Bank of Namibia

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

Nedbank of Namibia

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

Bank Windhoek

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

Profitability Performance (N$’000)

Standard Bank of Namibia

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

First national Banks of Namibia

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual report

Nedbank of Namibia

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

Bank Windhoek

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

Liquidity Performance (N$’000)

Standard Bank of Namibia

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

First National Bank of Namibia

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

Nedbank of Namibia

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

Bank Windhoek

illustration not visible in this excerpt

Source: Own Computation; various banks’ annual reports

illustration not visible in this excerpt