Effect Of Credit Risk On The Profitability Of Commercial Banks In Nigeria

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