ABSTRACT

The study broadly investigated the effect of credit risk on the performance of commercial banks in Nigeria. To achieve this objective, the study specifically investigated the effect of loan-to-total assets ratio, non-performing loans and interest rate on return on assets of commercial banks in Nigeria. Aggregate loan-to-total assets ratio, non-performing loans ratio and interest rate of the commercial banks in Nigeria were used as the independent variables and measures of credit risk while return on assets was used as the proxy for performance and the dependent variable. The study covered the period 1996 to 2016. A trend analysis of the return on assets, credit risk ratios and interest rate was carried out to ascertain the movement of the variables over time. Thereafter, the study employed the Ordinary Least Squares (OLS) method to determine the effect of the independent variables on the dependent variable. From the empirical outcomes, it was shown that loan-to-total assets ratio and interest rate had positive and insignificant effect on the performance (proxied by return on assets) of commercial banks in Nigeria. On the other hand, the study revealed that non-performing loans had a negative and significant effect on the performance of commercial banks in Nigeria. The study recommended that managers of commercial banks in Nigeria should desist from granting illegal and sentiment-backed loans to their family members and cronies in order to eliminate the non-performing loans syndrome plaguing the banking industry in Nigeria.

TABLE OF CONTENTS

Title Page i

Declaration ii

Certification iii

Dedication iv

Acknowledgement v

Table of Contents vi

Lists of Tables vii

Abstract viii

CHAPTER ONE

1.0 Introduction 1

1.1 Background to the Study 1

1.2 Statement of the Problem 3

1.3 Objectives of the Study 4

1.4 Research Questions 4

1.5 Research Hypotheses 5

1.6 Significance of the Study 5

1.7 Scope of the Study 6

1.8 Limitation of the Study 6

1.9 Definition of Terms

CHAPTER TWO

2.0 Review of Related Literature 8

2.1 Conceptual Framework 8

2.1.1 What is Risk? 8

2.1.2 What is Credit Risk? 8

2.1.3 Banks Performance and its Determinants 11

2.1.4 Internal Determinants 13

2.1.5 External Determinants 17

2.2 Theoretical Framework 18

2.2.1 Commercial Loan Theory 18

2.2.2 The Shiftability Theory 19

2.2.3 The Anticipated Income Theory 20

2.2.4 The Credit Risk Theory 20

2.2.5 The Liability Management Theory 21

2.3 Empirical Review  21

CHAPTER THREE

3.0 Research Methodology 27

3.1 Research Design 27

3.2 Area of the Study 27

3.3 Nature and Sources of Data 27

3.4 Technique of data analysis 28

3.5 Model Specification 28

3.6 Description of Research Variables 29

CHAPTER FOUR

4.0 Data Presentation, Data Analysis and Discussion of Findings 31

4.1 Data Presentation 31

4.1.1 Return on Assets (ROA) 32

4.1.2 Loan-to-Total Assets Ratio (LTA) 33

4.1.3 Non-Performing Loans (NPLs) 33

4.1.4 Interest Rate 34

4.2 Data Analysis 34

4.3 Test of Hypotheses 37

4.3.1 Hypothesis One 38

4.3.2 Hypothesis Two 38

4.3.3 Hypothesis Three 38

4.4 Discussion of Findings 39

CHAPTER FIVE

5.0 Summary of findings, conclusion and recommendations 42

5.1 Summary of Findings 42

5.2 Conclusion 42

5.3 Recommendations 43

Reference 44

Appendix 51