Credit Risk Management and Performance of Selected Deposit Money Banks in Nigeria

Abstract

This study examined credit management and performance of selected Deposit Money Banks in Nigeria. The time series data was sourced from the audited financial statements of the banks. Non-performing Loans (NPLs), Loan-to-Deposit Ratio (LDR), Liquidity Ratio (LQR), and Capital Adequacy Ratio (CAR) were used as a proxy of credit management. In contrast, return on equity (ROE) was used to measure performance. The stationarity of the time series was tested using the LLC, IPS, and ADF PP tests. Using the panel regression of fixed effects and random effects techniques, the study found that credit management had a positive and significant effect on MDB performance in MDBs under the reviewed period. From the indicators, the liquidity ratio (LQR) was found to have a positive but insignificant effect on ROE. The findings also revealed that NPL has a positive but insignificant effect on ROE. The study further found that the capital adequacy ratio (CAR) negatively but significantly affected ROE. Loan to deposit ratio (LDR) was found to have a negative and insignificant effect on ROE. The study recommended, among other things, that to maintain a stable liquidity ratio and meet financial obligations, banks should endeavor to operate within the CBN policy minimum requirement of liquidity ratio at 30%, which can be achieved by shortening asset maturity, lengthening liability maturities, and possibly issuing more equity. The findings of this study indicate that effective credit management policies are essential for improving the performance of DMBs in Nigeria. Policymakers should focus on enforcing liquidity and capital adequacy regulations to ensure banks can withstand credit risks without compromising profitability. Also, maintaining non-performing loans within regulatory thresholds is crucial for sustaining asset quality and financial stability in the banking sector.