Credit Risk Management and Deposit Money Banks Stability in Nigeria: Does Good Corporate Governance Matter?

Donald O Nwankwo ,Osasere Kindness Bencharles

doi:10.7176/rjfa/12-16-01

Abstract

The study examined the impact of credit risk management on deposit money banks stability and the moderating role of corporate governance. The study period spanned 11 years (2009-2019) and twelve (12) deposit money banks were taken as sample for the study. Annual data from sampled banks were subjected to various statistical and empirical tests. The pooled model, random effect (REM) and fixed effect model (FEM) techniques of the panel least square was adopted for empirical testing while statistical testing was done using the descriptive statistics, unit root tests and co-integration tests. Credit risk management was measured using data on non-performing loans (NPL), liquid ratio (LQR), capital adequacy ratio (CAR) and loan loss provisioning (LLP) while bank size (BS) was introduced as a control variable. Corporate governance was measured using data on audit committee independence (ACI). Banks stability was measured using the Z-score of sampled banks. Empirical result indicated that NPL had a negative insignificant relationship with bank stability and a positive insignificant relationship with bank stability when corporate governance was introduced. Other credit risk management variables (LQR, CAR, LLPR) were found to strengthen banks stability although their significance were mixed. Bank size was found to be negatively related with banks stability. Premise on research findings, the study concluded that credit risk management is germane to the stability of deposit money banks in Nigeria during the period of study. It was also concluded that corporate governance although having a positive relationship with banks stability has no significant impact. Among other things, the study recommended that detailed policies and procedures for non-performing loans exposure, management and recovery are in place so as to reduce the incidence of non-performing loans. Keywords: Credit Risk, Bank Stability, Corporate Governance, Z-Score. DOI: 10.7176/RJFA/12-16-01 Publication date: August 31 st 2021

Highlights

In recent times, the role played by financial institution in economic development cannot be down played
5.Conclusion and Recommendations This study examines the impact of credit risk management on banks stability as well as the moderating role of corporate governance among deposit money banks in Nigeria
This study was necessitated by the alarming distress and failures that faced the Nigeria banks which led to the recapitalization and consolidation of the Nigeria banking sector

Summary

Introduction

The role played by financial institution in economic development cannot be down played. Financial institutions in general and banking institutions in particular carryout the role of financial intermediation by creating wealth and transferring such wealth from deficit to surplus unit through the extension of loans and advances. Rwayitare, Shukla and Ruhara (2016) have described the activities of deposit money banks (DMB’s) to be like blood arteries of the human body in developing economies especially in Nigeria as it accounts for a substantial part of its financial assets. Deposit money banks activities enhance commercial activities, facilitate an efficient payment system and serves as the main source of liquidity in the financial system (Cohen, 1986). Banks are exposed to considerable risk when they carry out intermediation services and this risk includes credit risk, liquidity risk, market risk, legal risk, foreign exchange risk as well as operational risk. Credit risk according to Coyle (2000) is the risk stemming from the inability of debtors to repay what is owed as at when due

Objectives

Methods

Discussion

Conclusion