Effects of non-performing loans on return on equity of selected commercial banks in Nigeria

Abstract

The study examined the effect of Non-Performing Loans (NPL) on return on equity (ROE) of selected Commercial Banks in Nigeria covering the period 2010 - 2021 with special emphasis on Fidelity Bank, Union Bank and Wema Bank Plc. It specifically determined the effect of non-performing loans (NPL) and Bank Size (SIZE) on the profitable of commercial banks measured by Return on Equity (ROE). The study utilized secondary data obtained from the annual financial report and accounts of the selected commercial banks in Nigeria for the period of study. The data were analyzed using panel least square method of analysis. The results revealed that while non-performing loans have negative outcome on return on equity of the selected commercial banks, Bank Size (SIZE) has a positive impact on return on equity of the selected commercial banks within the period of study. The study concludes that there exists a negative effect of non-performing loans on performance of commercial banks in Nigeria and the effect cannot be underestimated because it poses a fundamental threat to the existence and growth of commercial banks as corporate business entities. Based on the above findings, the study recommends that banks should maintain high credit standards while the apex bank (CBN) and other regulatory agencies should maintain high surveillance on commercial banks’ credit operations. A decrease in level of loan default will lead to decline in non-performing loans, and successively enhance return on equity of affected banks in Nigeria.