IMPACT OF NON-PERFORMING LOANS ON COMMERCIAL BANKS PERFORMANCE IN NIGERIA (A STUDY OF SOME SELECTED BANKS)

ABSTRACT

The study sought to find the effect of non-performing loans on the performance of commercial banks in Nigeria. Hence, the study used time series data spanning from 1990 to 2017. The study employed ordinary least square (OLS) multiple regression model to analyzed data on return on asset (ROA) used to measure the performance of commercial banks, bad loans, substandard loans and doubtful loans generated from Zenith Bank and Eco bank annual reports covering the time frame reviewed. Following the results of the data analysis, it was found that bad loans has a significant effect on return on asset (proxy for bank performance). Sub-standard loans have a positive and insignificant effect on the performance of commercial banks in Nigeria. Also, it was evident that doubtful loans had a negative and insignificant effect on commercial banks’ performance. Hence, the need for a strong policy on the management of banks’ credit facility was recommended, need for an immediate change in the banks’ management style and internal control system of the banks was also recommended. And lastly, need for a proper and well-articulated analyses over all collaterals presented for loans and advances was also suggested.

TABLE OF CONTENTS

Contents ﾿       ﾿ Page

Title ﾿ i

Declaration ﾿ ii

Certification ﾿ iii

Dedication ﾿ iv

Acknowledgments ﾿ v

Table of contents ﾿ vi

List of tables ﾿ viii

Abstract ﾿ ix

CHAPTER ONE

INTRODUCTION ﾿ 1

1.1 ﾿ Background to the Study ﾿ 1

1.2 ﾿ Statement of the Problem ﾿ 3

1.3 ﾿ Objectives of the Study ﾿ 5

1.4 ﾿ Research Questions ﾿ 5

1.5 ﾿ Research Hypotheses ﾿ 6

1.6 ﾿ Significance of the Study ﾿ 6

1.7 ﾿ Scope of Study ﾿ 8

CHAPTER TWO

REVIEW OF RELATED LITERATURE ﾿ 9

2.1 ﾿ Conceptual Framework ﾿ 9

2.1.1 ﾿ Concept of non-performing loans ﾿ 9

2.1.2 ﾿ Concept of financial performance ﾿ 10

2.1.3 ﾿ Essence of Non-Performing Loans (NPL) ﾿ 11

2.1.4 ﾿ NPLs and financial performance of Banks in Nigeria ﾿ 12

2.1.5 ﾿ Intermediation Function of Banks ﾿ 12

2.1.6 ﾿ Loan in the Banking Industry ﾿ 13

2.1.7 ﾿ Non-Performing Loans in Nigeria ﾿ 14

2.1.8 ﾿ Causes of Non-Performing Loans in Nigeria ﾿ 15

2.1.9 ﾿ Reducing levels of non-performing loans ﾿ 17

2.2 ﾿ Theoretical Framework ﾿ 18

2.2.1 ﾿ Theory of Asymmetric Information ﾿ 18

2.2.2 ﾿ Theory of life-cycle consumption ﾿ 19

2.2.3 ﾿ The Moral Hazard Theory ﾿ 19

2.2.4 ﾿ Adverse Selection Theory ﾿ 20

2.2.5. The Stewardship Theory ﾿ 20

2.3 ﾿ Empirical Review ﾿ 21

2.4 ﾿ Summary of Literature Review ﾿ 28

CHAPTER THREE

RESEARCH METHODOLOGY ﾿ 29

3.1 ﾿ Research Design ﾿ 29

3.2 ﾿ Sampling Technique ﾿ 29

3.3 ﾿ Nature and Sources of Data ﾿ 29

3.4 ﾿ Model Specification ﾿ 29

3.4.1 ﾿ Description of Research Variables ﾿ 30

3.5 ﾿ Analytical Technique ﾿ 31

3.5.1 ﾿ Ordinary Least Squares (OLS) Technique ﾿ 31

3.5.2 ﾿ Coefficient of Multiple Determination ﾿ 32

3.5.3 ﾿ F-statistic ﾿ 32

3.5.4 ﾿ t-Statistic ﾿ 32

CHAPTER FOUR

4.1 ﾿ Presentation of Data ﾿ 33

4.2 ﾿ Data Analysis and Discussion of Results ﾿ 34

4.2.1 ﾿ Regression Analysis ﾿ 34

4.3 ﾿ Testing of Hypotheses ﾿ 36

4.3.1 ﾿ Testing of Hypotheses One ﾿ 36

4.3.2 ﾿ Testing of Hypotheses Two ﾿ 37

4.3.3 ﾿ Testing of Hypotheses Three ﾿ 38

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS ﾿ 39

5.1 ﾿ Summary of Findings ﾿ 39

5.2 ﾿ Conclusion ﾿ 40

5.3 ﾿ Recommendations ﾿ 40

REFERENCES ﾿ 41

APPENDIX ﾿ 47

LIST OF TABLES

Table 4.1: ﾿ Aggregate Data for the Analysis (1990 to 2017) ﾿ 33