Non-performing Loans and Deposit Money Banks’ Financial Performance: Empirical Evidence from Nigeria

Abstract

Nigeria’s deposit money banks (DMBs) are financial institutions licensed by the Central Bank of Nigeria to mobilize demand and saving deposits from the surplus economic units for on-lending to the deficit economic units for investment and consumption purposes. In carrying out this intermediation function, DMBs are exposed to several risks including credit risk, market risk, interest rate risk, exchange rate risk, and others. Of these risks, the credit risk seems the most harmful to DMBs’ financial performance as its occurrence can easily and quickly send a bank into distress or outright liquidation. For over a decade now, DMBs in the country have been experiencing continuously increasing nonperforming loans portfolios. This type of scenario had led to poor financial performance among the Banks. It is for this reason that the present study seeks to verify empirically the impact of certain financial and macroeconomic variables on DMBs’ financial performance for the period 2001 to 2021, that is, 21 years. In doing this, we dissected financial performance into return on assets and return on equity. Hence, two separate models were specified in the study with return on asset and return on equity serving as the dependent variables in each of the models, while non-performing loans, loan-loss provisions, lending rate, bank size, monetary policy rate and inflation rate represented the independent variables. The longitudinal research design was adopted since the study’s data covered a specific timeframe. The fully modified ordinary least squares and the panel data regression techniques were used to analyze the data. The findings of the study revealed, among others, that non-performing loans exerted a negative impact on the financial performance of the DMBs in terms of return on assets and return on equity. It was, therefore, recommended that provisions for loan losses, even though appeared with positive impact on return assets and return on equity, should to be scaled up as the variable is frequently used as a strategic and effective means for mitigating loans losses and, invariably, the financial performance of the DMBs.