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

Abstract

This study investigates the effect of credit risk on the financial performance of selected deposit money banks in Nigeria over the period 2012–2024. Using panel data for five banks, the study applies the Fully Modified Ordinary Least Squares (FMOLS) technique to examine the long-run relationship between credit risk indicators and bank profitability. Financial performance is measured by return on assets (ROA), while credit risk is proxied by non-performing loans and loan loss provisions. The empirical results reveal that credit risk has a negative and statistically significant effect on bank performance, indicating that higher levels of loan default and provisioning reduce profitability in the Nigerian banking sector. In contrast, bank size and interest rate are found to exert a positive and significant influence on financial performance, while inflation rate adversely affects bank profitability. Based on these findings, the study recommends that deposit money banks strengthen their credit appraisal, loan monitoring, and recovery mechanisms to minimize non-performing loans, while adopting prudent provisioning practices that do not excessively erode earnings. Additionally, banks should leverage economies of scale and implement effective interest rate management strategies to enhance performance. The study further stresses the need for regulatory authorities and policymakers to pursue policies that curb inflationary pressures and promote macroeconomic stability, as these are crucial for improving the resilience and financial performance of Nigeria’s banking sector.