Nigerian Journal of Banking and Financial Issues (NJBFI)

The effects of credit risk management on the deposit Money bank’s performance in Nigeria

Abstract

The study investigated how credit risk management affected Nigerian deposit money banks' performance over a 15-year period (2005 to 2019). The macroeconomic variables considered include the total bank loan, the loan to asset ratio, the loan to deposit ratio, and profit after tax. The long-term link that exists among the variables under consideration was examined using OLS regression techniques, pairwise granger causality tests, Johansen- Fisher cointegration tests, and Kao Residual Co-integration tests. The analysis revealed that, with the exception of total bank loans (TBL), all independent variables had a negative association with the dependent variable (PAT). This meant that the loan to asset ratio had a negative relationship with PAT of (-0.844290). The results also showed that the loan to deposit ratio (LDR) has a statistically insignificant connection with the dependent variable (PAT), with a slope of (-1.571297). The study came to the conclusion that credit risk has a short-term, considerable negative impact on bank performance. The loan-to-deposit ratio LDR was also found to be statistically insignificant and to maintain an inverse relationship with the dependent variable (PAT) by -1.571297%, according to the findings. The study came to the conclusion that credit risk has a negative and significant short-term impact on bank performance. The study concluded that the dependent and independent variables may have a long-term equilibrium relationship based on the estimated results of various co-integration tests. The study suggested that banks should, among other things, follow prudent and stringent credit policies to reduce the number of non-performing loans. In order to reduce the likelihood of a bank's failure and ensure that banks appropriately manage their credit risk, regulators must increase supervision at the macro level.