Determinants of the nonperforming loans of Nigerian deposit money banks

Wasiu Abiodun Sanyaolu1, Trimisiu Tunji Siyanbola2 and Hafeez Babatunde Makinde3

1Department of Accounting, Crescent University, Abeokuta, Ogun State, Nigeria
2Department of Accounting, Babcock University, Ilishan Remo, Ogun State, Nigeria
3Department of Business and Finance, Crescent University, Abeokuta, Ogun State, Nigeria

Credit risk is one of the biggest challenges banks in Nigeria are faced with. By implication, it is also the one with dire consequences for their operation and survival, given the fact that a series of banks’ failures have significantly been brought into connection with nonperforming loans. Thus, this study examined the bank-specific and macroeconomic determinants of the nonperforming loans of the listed Deposit Money Banks (DMBs). Regression analysis involving fixed effect was adopted in order to analyze the panel data of the 10 selected deposit money banks in the period from 2008 to 2017. The findings show that the capital adequacy ratio, the size and the loans-to-total-assets ratio negatively and significantly affect nonperforming loans, whereas profitability and age were found to significantly but positively influence nonperforming loans of the Nigerian deposit money banks. More so, the liquidity ratio negatively, but insignificantly, affects nonperforming loans. However, not a single macroeconomic variable exerts a significant effect on nonperforming loans. The study recommends that banks should always deploy strategies for credit risk management by taking cognizance of the bank-specific and economic determinants of the nonperforming loans.

Keywords: bank-specific indicators, deposit money banks, macroeconomic indicators, fixed effect and nonperforming loans

JEL Classification: G01

Ekonomski horizonti2020, 22(1), 31-45. Elektronska verzija objavljena 24. aprila 2020