The determinants of the Nigerian listed financial institutions’ financial performance: A review of the CAMELS framework

Abstract

This study evaluates the financial performance determinants of Nigerian listed financial institutions (NLFIs) using the CAMELS framework, a multidimensional approach that holistically assesses financial institutions. The research identifies key factors affecting financial performance, spanning seven years (2012–2018). The study aims to provide insights into how capital adequacy, asset quality, management quality, earnings quality, liquidity, and sensitivity impact performance, ultimately offering recommendations for regulatory improvements and adherence to prudential standards. The research employs panel data analysis of NLFIs from 2012 to 2018. Using pooled ordinary least squares (POLS), the study identifies key determinants of financial performance. The two-step system generalized method of moments (SYS-GMM) is applied for robustness to address heteroskedasticity and endogeneity concerns. These methods assess the impact of CAMELS variables (CA, AQ, MQ, EQ, LIQ, SENT) on financial performance while ensuring reliable and generalizable findings. The results reveal that capital adequacy (CA), asset quality (AQ), liquidity (LIQ), and sensitivity (SENT) are consistent and significant determinants of NLFIs' financial performance. Management quality (MQ) is insignificant in POLS but becomes significant in SYS-GMM analysis, while earnings quality (EQ) shifts to insignificance. The findings highlight the importance of minimum standards for CA, AQ, and LIQ compliance while emphasizing the need to develop similar benchmarks for MQ, EQ, and SENT. This study contributes to the limited literature on CAMELS-based financial performance evaluation in developing economies, particularly in Africa. It provides novel insights into the financial performance of NLFIs, emphasizing the importance of regulatory compliance with minimum standards and suggesting enhancements for management quality, earnings quality, and sensitivity measures. The findings are valuable for policymakers, regulators, and financial practitioners aiming to improve the stability and performance of Nigeria's financial sector.