Tag Archives: Non-Performing Loans

Credit Risk Management and Financial Stability in Quoted Deposit Money Banks in Nigeria (Published)

In the history of development of the Nigerian banking industry, it is evident that most of the failures experienced within the industry prior to the consolidation era were as a result of financial dampening that finally led to bad loans and some other unethical factors and financial stability has generated the ever-increasing attention and interest in academic and banking sector in Nigeria. This study examined the effect of credit risk management on financial stability of deposit money banks in Nigeria; specifically assessing the relationship between credit risk management and financial stability and establishing the level of credit risk measures to be put in place to ensure financial stability of deposit money banks in Nigeria. The study adopted ex-post facto research design. The target population comprised of 22 deposit money banks in Nigeria licensed by the Central Bank of Nigeria as at November 30th, 2018 from which 10 deposit money banks were purposively selected. Data were sourced from the audited and published financial statements of the selected deposit money banks. The data were validated by the statutory auditors. Descriptive and inferential statistics (multiple regression) were used to analyze the result. The findings revealed that asset quality represented by non-performing loan to gross loan ratio (NLPR), Total risk Asset to total asset ratio (TRAR), Loan Loss Provision to total loan ratio (LLPR) and Total Loan to total deposit ratio (TLDR), all had a significant effect on the variables of Financial Stability which are; Debt-to-Shareholders Fund F (99)=11.17, Adj. R2= 0.2419, p < 0.10, Capital Adequacy Ratio F(99) = 20.77, Adj. R2= 0.0490, p < 0.10, Fixed Deposit Cover F(99) = 8.95, Adj. R2= 0.165, p < 0.10 and had joint insignificant effect on Liquidity Ratio F(99)=1.31, Adj. R2= 0.486, p> 0.10 of deposit money banks in Nigeria. The study concluded that credit risk management influenced financial stability of quoted deposit money banks in Nigeria. The study recommended that operators of banks, should pay more attention to those variables of credit risk management in order to improve financial stability by managing credit risk that deposit money banks are facing to improve financial stability and to put in place proper credit management policy to mitigate credit risk and to also improve the knowledge of credit management policy in financial institutions.

Keywords: Credit Risk Management, Deposit Money Banks, Non-Performing Loans, credit management policy, financial stability


Since the introduction of Structural Adjustment Programme (SAP) in Nigeria in the 1980’s, the financial system has witnessed excessive liberalization. Community Banks which were the main stay of the financial system have transformed to Microfinance Banks (MFB) resulting from the uncontrolled collapsed of these institutions.  The Central Bank of Nigeria (CBN) very recently introduced reforms meant to curb the high incidence of bank failures in the country that required the introduction of minimum capital requirement for the establishment of commercial Banks and MFBs. After some years of experiments, it was obvious that the reforms put in place were not adequate to stem the tide of bank failures. It was as a result of this that the Apex Bank (Central Bank of Nigeria) increase the minimum capital requirement for commercial banks to N25b ($160,000).  Many Banks could not meet this new capital requirement and were faced with the option of been merged with other stronger banks or allowed themselves to be completely taken over by other banks.  From researches done on the performance of banks, it has been proven that banks tend to do very well when the economy is also doing very well. It is on this basis that this work has been undertaken to confirm this assertion or otherwise confirm that non- performing loans tend to increase when the economy slacks into a recession.  The study found that increase in non-performing loans impacted negatively on the Gross Domestic Product in Nigeria and that increase in lending  rate and inflation rate cause non-performing loans to increase. The implication of this study is that Central bank should introduce policies that can have moderating effects on inflation and lending rates.Government should pay their loans on time and insider abuse should be eliminated from the financial system. Above all, banks should know their customers before granting loans to them, infact adhering strictly to the 5C’s of credit in modern banking practice.

Keywords: Collateral, Economy, Inflation Rate, Interest Rate, Non-Performing Loans, Reforms/Government Policies