Effect of Interest Expenses on Retained Earnings of Deposit Money Banks in Nigeria

The study evaluated the effect of interest expenses on retained earnings of deposit money banks in Nigeria. Specifically, the study examined the effect of interest on deposit, interest on debt securities and interest on loans on retained earnings of deposit money banks in Nigeria. The study targeted the entire twenty-three (23) deposit money banks listed on the Nigeria Exchange Plc during the period out of which five (5) were sampled for the study. Only deposit money banks that consistently used debt securities during the period were considered in the sample. Time series data spanning the period from 2011 to 2020 were collected and analysed using multiple regression analysis. Results of the analysis indicate that the effect of interest on debt securities and interest on loans negatively and insignificantly affect retained earnings of deposit money banks in Nigeria. Result also indicate that the effect of interest on deposit on retained earnings is positive, but statistically none-significant. The implication of these findings is that deposit liability and equity are the preferred financing options for the deposit money banks as opposed to term loans and debt securities.  In line with these findings, the study strongly recommends that deposit money banks’ management in Nigeria should intensify their efforts in deposit mobilization so as to increase their banks’ retained earnings. Since the effect of debt security on retained earnings is negative and insignificant, the study further recommends that the banks’ management should use more of equity as source of finance. Finally, we recommend that the management should use more of equity to finance their business operations. This is because the findings from the study show that interest on loans negatively and insignificantly affects retained earnings of the bank.