Credit Risk Management, Capital Adequacy Ratio and the Financial Performance of Listed Deposit Money Banks in Nigeria

Abstract

The effect of credit risk management and capital adequacy on the profitability of Money Deposit Bank had been a subject of hot debates among the professionals and academic scholars. This study examines the impacts of credit risk management and capital adequacy on the performance of money deposit banks in Nigeria using panel data regression analysis conducted on E-view 7 data analysis software. Secondary data in the form of time series and cross-sectional data were obtained from the bank’s reports. Credit risk variables and capital adequacy ratio were extracted from 12 banks annual reports for the period 2015 to 2021. The independent variables are credit risk and capital adequacy ratio , while the independent variable is bank performance proxied on Return on Asset (ROA) and Return on Equity(ROE).This study found that loans and advances (LA) has negative and significant relationship with return on asset (ROA) (β=0.04; t=4). Loans and advances (LA) have positive and significant relationship with banks financial performance as proxied by return on equity (ROE) (α=0.01; t=2). The study also found that capital adequacy ratio (CAR) has positive and significant relationship with banks financial performance as proxied by return on equity (ROE) (α =-0.04; t=2). Loans and advances have negative and significant relationship with return on asset (ROA) (β=-0.19; t=-2). Non-performing loan has negative and significant relationship with return on equity (ROE) (α=-0.057; t=2). It is therefore recommended that banks management should constantly review their credit policy guidelines from time to time in consonance with the dynamics of business environment. Nigerian banks must constantly enhance their capital to serve as buffer to cushion the adverse effect of loan capital erosion arising from non-performing loans. Keywords: Credit; Risk, Capital adequacy, Management, Financial performance