Abstract
The study examined the effect of Non-Performing Loans on the financial performance of commercial banks in Nigeria between the periods of 1985 to 2016. The study employed the multiple regression techniques to analyze data collated from the Central Bank of Nigeria (CBN) statistical bulletin and Nigeria Deposit Insurance Corporation (NDIC) publications for various years. The result of the study shows that Non-Performing Loans to Total Loans ratio (NPL/TLR) and Cash Reserve Ratio (CRR) had statistically negative significant effect on Return on Asset (ROA). These result shows that a high level of non-performing loans would reduce the financial performance of commercial banks in Nigeria. Consequently, the study recommends that the regulatory authorities in Nigeria should create and support an environment where commercial banks in Nigeria can have a strong risk management practices.
Highlights
The efficiency of the bank’s performance is a function of how they are able to satisfy their customers at a minimum risk level and maximize profit as well
The Nigeria banking industry, according to Nigerian Deposit Insurance Corporation (NDIC) (2013) annual statement and account show that the total loans and advances stood at N10.043 trillion in 2013, showing an increase of 23.22 percent over N8.150 trillion granted in 2012, and that the non-performing loans to total loans ratio improved from 3.51 percent in 2012 to 3.23 percent in 2013, this according to the report was within the regulatory threshold of 5 percent
Return on Asset (ROA) was employed as proxy for the financial performance of commercial banks which is the dependent variable, and on the other hand non-performing loans (NPLs)/TL, Cash Reserve Ratio (CRR) and IFR were used as proxy for NonPerforming Loans
Summary
The efficiency of the bank’s performance is a function of how they are able to satisfy their customers at a minimum risk level and maximize profit as well. According to Ahmad & Ariff (2013), most banks in Nigeria and other economies such as Thailand, Indonesia, Malaysia, Japan and Mexico experienced high Non-Performing Loans (NPLs) and significant increase in credit risk during financial and banking crises, which resulted in the closing down of several banks in Indonesia and Thailand. The negative effect of credit risk and non-performing loans on banks performance and the economy in general has made the issue of NPLs a global one and of great importance in the last www.acseusa.org/journal/index.php/aijbms American International Journal of Business and Management Studies Vol 1, No 2; 2019 decades. According to Hou & Dickinson (2007), many researches on the causes of bank failures found that asset quality is a statistically significant predictor of insolvency, and that failing bank institutions always have high level of Non-performing loans prior to failure.
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