CREDIT RISK MANAGEMENT AND BANKS’ FINANCIAL PERFORMANCE NEXUS IN NIGERIA: EVIDENCE FROM AN ERROR CORRECTION MODEL
Abstract
This study investigated the cause-effect relationship between credit risk management and financial performance of Deposit Money Banks (DMBs) in Nigeria for the period 2000 to 2024. Related literature for the study was reviewed conceptually, theoretically and empirically. Thus, adopting a single equation model, capital adequacy ratio, non-performing loan ratio, loan-to-deposit ratio, and liquidity ratio were credit risk management indices considered while net interest margin (NIM) was used to proxy financial performance. Relying on secondary data sourced from Central Bank of Nigeria (CBN) statistical bulletin for 2024 and the World Bank (2024), the ARDL (Autoregressive Distributed Lag) technique was primarily used for data analysis and model estimation. The data was also exposed to descriptive analysis, unit root test, and diagnostic tests. Findings from the ARDL analysis revealed that in the short run, loan-to-deposit ratio has a negative insignificant effect on NIM while capital adequacy ratio, non-performing loan ratio and liquidity ratio have positive insignificant effects on NIM. The study further showed that there is a long run relationship between credit risk management and financial performance of banks though only the effect of non-performing loan was significant in the long run. The study adduced that credit risk management has an insignificant effect on the financial performance of Deposit Money Banks in Nigeria. Hence, Deposit Money Banks should focus on optimizing their capital structure in order to minimize costs and maximize returns.
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Published in WEST AFRICAN JOURNAL OF BUSINESS AND MANAGEMENT SCIENCES
ISSN: 978-37989
This article appears in our peer-reviewed academic journal
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