CREDIT RISK MANAGEMENT AND FINANCIAL PERFORMANCE: A STUDY OFSELECTED DEPOSIT MONEY BANKS IN NIGERIA
Keywords:
Credit Risk; Financial Performance; Non-performing Loans; Total Assets; Return on Assets
Abstract
The study on the credit risk management and financial performance of deposit money banks in Nigeria, 2004 – 2022, aimed to understand the relationship between non-performing loans, total loans, bank’s capital as the independent variables and return on investments, return on equity as the dependent variables. Financial statement of five commercial banks in Nigeria were obtained between 2004 and 2022. Panel regression analysis was used to analyse the time series data. The analysis covered the descriptive analysis, unit root analysis, pooled regression analysis, random effect, fixed effects as well as hausman tests. The post estimation tests included serial correlation analysis and heteroskedasticity tests. The study found that non-performing loans, total loans have negative and significant relationship with ROE but positive and significant relationship with ROI. Bank capital was also found to have positive and significant relationship with financial performance of deposit money banks in Nigeria. The study recommended, amongst others, that deposit money banks must ensure that the loans they disburse perform and also, they should device efficient systems of monitoring their total loan disbursements.
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References
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Imai, K. and Kim, I.S., (2021). On the use of two-way fixed effects regression models for causal inference with panel data. Political Analysis, 29(3): 405-415.
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Mayowa, G. A & Ehi, P.O (2019). Investigates the relationship between credit risk management and the performance of Deposit Money Banks (DMBs) in Nigeria. African Review of Economics and Finance 11(1): 157-175.
Mengze, H. and Wei, L., (2015). A comparative study on environment credit risk management of commercial banks in the Asia‐Pacific region. Business Strategy and the Environment, 24(3): 159-174.
Messai, A.S. and Jouini, F., (2013). Micro and macro determinants of non-performing loans. International journal of economics and financial issues, 3(4): 852-860.
Monteiro, M. A. (2006). White paper on corporate governance in Portugal. Portuguese Instituteof Corporate Governance.
Mummolo J, &Peterson E., (2018). Improving the interpretation of fixed effects regression results. Political Science Research and Methods 6 (4): 829–835.
Musyoki, D. and Kadubo, A.S., (2012). The impact of credit risk management on the financial performance of banks in Kenya for the period. International Journal of Business and Public Management, 2(2): 72-80.
Muthee, J.G., (2010). The relationship between credit risk management and profitability: A study of commercial banks in Kenya (Doctoral dissertation, University of Nairobi, Kenya).
Mwangi, G.N., (2012). The effect of credit risk management on the financial performance of commercial banks in Kenya (Doctoral dissertation, University of Nairobi).
Ogboi, C. and Unuafe, O.K., (2013). Impact of credit risk management and capital adequacy on the financial performance of commercial banks in Nigeria. Journal of emerging issues in economics, finance and banking, 2(3): 703-717.
Ogbuagu, U.R., Udoh, E. and Udoh, F.M., (2016). Loan Risk (LR), Loan Risk Management (LRM) and Commercial Bank Profitability: A Panel Analysis of Nigerian Banks.
Ogbulu, O.M. and Eze, G.P., (2016). Credit risk management and the performance of deposit money banks in Nigeria: An error correction analysis. Applied Economics and Finance, 3(2): 97-109.
Okolo, B. A. (2009). Research methods in language and linguistics. Benin City: Mindex Publishing Company.
Pesaran, M.H. (2007). A simple panel unit root test in the presence of cross section dependence. Journal of Applied Econometrics, (22), 265-312.
Poudel, R.P.S., (2012). The impact of credit risk management on financial performance of commercial banks in Nepal. International Journal of arts and commerce, 1(5): 9-15.
Serwadda Isah (2018) Impact of Credit Risk Management Systems on the Financial Performance of Commercial Banks in Uganda. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 66(6): 1627 – 1635.
Siddique, A., Khan, M.A. and Khan, Z., (2021). The effect of credit risk management and bank-specific factors on the financial performance of the South Asian commercial banks. Asian Journal of Accounting Research, 7(2): 182-194.
Stowe, J. D., Robinson, T. R., Pinto, J. E., &McLeavey, D. W. (2007). Equity assetvaluation (Vol. 4). John Wiley & Sons.
Sulaiman, N.F.C., Saputra, J. and Muhamad, S., (2021). Effects of human capital and innovation on economic growth in selected ASEAN Countries: Evidence from panel regression approach. The Journal of Asian Finance, Economics and Business (JAFEB), 8(7): 43-54.
Timoneda, J.C., (2021). Estimating group fixed effects in panel data with a binary dependent variable: How the LPM outperforms logistic regression in rare events data. Social Science Research, (93): 10-24.
Adekunle, O., Alalade, S.Y., Agbatogun, T. and Abimbola, C., (2015). Credit risk management and financial performance of selected commercial banks in Nigeria. Journal of Economic & Financial Studies, 3(01): 1-09.
Akomeah, J., Agumeh, R., & Siaw, F. (2020). Credit risk management and financial performance of listed banks in Ghana. Research journal of finance and accounting, 11(6): 39-48.
Ali, T. O., Maimuna, A., Sarmad, H. J., Mohammed, H. N.,Ganama, M. G. &Nazarudin, B. (2019). The relationshipbetween credit risk management practices and profitability inMalaysian commercial banks. International Journal ofEngineering and Advanced Technology (IJEAT) 8 (5): 61-67.
Al Zaidanin, J.S. and Al Zaidanin, O.J., (2021). The impact of credit risk management on the financial performance of United Arab Emirates commercial banks. International Journal of Research in Business and Social Science (2147-4478), 10(3): 303-319.
Amini, A.R., Wallace, J.S., &Nukavarapu, S.P., (2011). Short-term and long-term effects of orthopedic biodegradable implants. J long term eff med implants. 2011;21(2):93–122.
Alshatti, A. S. (2015). The effect of credit risk management on financial performance of the Jordanian commercial banks. Investment management and financial innovations, 12(1), 338-345.
Bliese, P.D., Schepker, D.J., Essman, S.M. and Ployhart, R.E., (2020). Bridging methodological divides between macro-and microresearch: Endogeneity and methods for panel data. Journal of Management, 46(1): 70-99.
Borenstein M., Hedges L.V., Higgins J.P.T, &Rothstein H.R. (2010). A basic introduction to fixed-effect and random-effects models for meta-analysis. Research Synthesis Methods; (1):97–111.
Campbell, D.E. and Kelly, J.S., (1994). Trade-off theory. The American Economic Review, 84(2): 422-426.
Dawson, G.S., Watson, R.T. and Boudreau, M.C., (2010). Information asymmetry in information systems consulting: Toward a theory of relationship constraints. Journal of management information systems, 27(3): 143-178.
Demirgüç-Kunt, A., Klapper, L., Singer, D., Ansar, S. and Hess, J., (2020). The Global Findex Database 2017: Measuring financial inclusion and opportunities to expand access to and use of financial services. The World Bank Economic Review, 34(Supplement1), 2-8.
Eisenhardt, K.M., (1989). Agency theory: An assessment and review. Academy of management review, 14(1): 57-74.
Epure, M. and Lafuente, I. (2012). Monitoring Bank Performance in the Presence ofRisk. Barcelona GSE Working Paper Series No.61.
Fattahi, S.H., Rezaei, M. and Jahed, T., (2017). The Effect of Banking Soundness on the Profitability of Commercial Banks: Threshold Panel Regression Approach. Journal of financial management strategy, 5(16): 29-50.
Hill, T.D., Davis, A.P., Roos, J.M. and French, M.T., (2020). Limitations of fixed-effects models for panel data. Sociological Perspectives, 63(3): 357-369.
Hosna, A., Manzura, B. and Juanjuan, S., (2009). Credit risk management and profitability in commercial banks in Sweden. rapport nr.: Master Degree Project 2009: 36.
Imai, K. and Kim, I.S., (2021). On the use of two-way fixed effects regression models for causal inference with panel data. Political Analysis, 29(3): 405-415.
Jufrizen, J. and Al Fatin, I.N., (2020). Pengaruhdebt to equity ratio, return on equity, return on assets. Dan ukuranperusahaanterhadapnilaiperusahaanpada perusahaanfarmasi. JurnalHumaniora: Jurnalilmusosial, ekonomi dan hukum, 4(1): 183-195.
Kargi, H.S. (2011), Credit risk and the performance of Nigerian banks. A study of GTB PLC (1991-2010). Journal of Business Research Administration, 3(2), 112-119.
Kelilume, Ikechukwu (2016).Exchange rate volatility and firm performance in Nigeria: A dynamic panel regression approach. The journal of developing areas, 50 (6):161-175.
Kimari, F.N., (2013). Effect of credit risk management on financial performance of deposit taking savings and credit cooperative societies in Kenya (Doctoral dissertation, University of Nairobi).
Kishori, B. & Jeslin, S. J. (2017) A study of the impact of credit risk on the Profitability of Indian Banks. International Journal of Science Research and Technology 3(1): 37-45.
Kithinji, A.M., (2010). Credit risk management and profitability of commercial banks in Kenya.
Kousky, C., Ritchie, L., Tierney, K. and Lingle, B., (2019). Return on investment analysis and its applicability to community disaster preparedness activities: Calculating costs and returns. International Journal of Disaster Risk Reduction, (41),101-296.
Lawless, H. and Heymann, H. (2010) Sensory Evaluation of Food Science Principles and Practices. Chapter 1, 2nd Edition, Ithaca, New York.
Mayowa, G. A & Ehi, P.O (2019). Investigates the relationship between credit risk management and the performance of Deposit Money Banks (DMBs) in Nigeria. African Review of Economics and Finance 11(1): 157-175.
Mengze, H. and Wei, L., (2015). A comparative study on environment credit risk management of commercial banks in the Asia‐Pacific region. Business Strategy and the Environment, 24(3): 159-174.
Messai, A.S. and Jouini, F., (2013). Micro and macro determinants of non-performing loans. International journal of economics and financial issues, 3(4): 852-860.
Monteiro, M. A. (2006). White paper on corporate governance in Portugal. Portuguese Instituteof Corporate Governance.
Mummolo J, &Peterson E., (2018). Improving the interpretation of fixed effects regression results. Political Science Research and Methods 6 (4): 829–835.
Musyoki, D. and Kadubo, A.S., (2012). The impact of credit risk management on the financial performance of banks in Kenya for the period. International Journal of Business and Public Management, 2(2): 72-80.
Muthee, J.G., (2010). The relationship between credit risk management and profitability: A study of commercial banks in Kenya (Doctoral dissertation, University of Nairobi, Kenya).
Mwangi, G.N., (2012). The effect of credit risk management on the financial performance of commercial banks in Kenya (Doctoral dissertation, University of Nairobi).
Ogboi, C. and Unuafe, O.K., (2013). Impact of credit risk management and capital adequacy on the financial performance of commercial banks in Nigeria. Journal of emerging issues in economics, finance and banking, 2(3): 703-717.
Ogbuagu, U.R., Udoh, E. and Udoh, F.M., (2016). Loan Risk (LR), Loan Risk Management (LRM) and Commercial Bank Profitability: A Panel Analysis of Nigerian Banks.
Ogbulu, O.M. and Eze, G.P., (2016). Credit risk management and the performance of deposit money banks in Nigeria: An error correction analysis. Applied Economics and Finance, 3(2): 97-109.
Okolo, B. A. (2009). Research methods in language and linguistics. Benin City: Mindex Publishing Company.
Pesaran, M.H. (2007). A simple panel unit root test in the presence of cross section dependence. Journal of Applied Econometrics, (22), 265-312.
Poudel, R.P.S., (2012). The impact of credit risk management on financial performance of commercial banks in Nepal. International Journal of arts and commerce, 1(5): 9-15.
Serwadda Isah (2018) Impact of Credit Risk Management Systems on the Financial Performance of Commercial Banks in Uganda. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 66(6): 1627 – 1635.
Siddique, A., Khan, M.A. and Khan, Z., (2021). The effect of credit risk management and bank-specific factors on the financial performance of the South Asian commercial banks. Asian Journal of Accounting Research, 7(2): 182-194.
Stowe, J. D., Robinson, T. R., Pinto, J. E., &McLeavey, D. W. (2007). Equity assetvaluation (Vol. 4). John Wiley & Sons.
Sulaiman, N.F.C., Saputra, J. and Muhamad, S., (2021). Effects of human capital and innovation on economic growth in selected ASEAN Countries: Evidence from panel regression approach. The Journal of Asian Finance, Economics and Business (JAFEB), 8(7): 43-54.
Timoneda, J.C., (2021). Estimating group fixed effects in panel data with a binary dependent variable: How the LPM outperforms logistic regression in rare events data. Social Science Research, (93): 10-24.
Published
2024-04-04
How to Cite
Emmanuel Uzoma, M., Ogechukwu Rita, M., Onyekachi Chikamnele, I., & Akeeb Olushola, O. (2024). CREDIT RISK MANAGEMENT AND FINANCIAL PERFORMANCE: A STUDY OFSELECTED DEPOSIT MONEY BANKS IN NIGERIA. GPH-International Journal of Business Management, 7(03), 107-132. https://doi.org/10.5281/zenodo.10929115
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Copyright (c) 2024 MAKWE, Emmanuel Uzoma
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