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

Abstract

This study sought to empirically examine the relationship between credit risk management and the financial performance of deposit money banks in Nigeria over a nine-year period (2009–2017). This study was motivated by the recognition that credit risk is one of the most critical exposures influencing the performance and sustainability of banks worldwide, and failure to effectively manage it can result in severe financial distress. Descriptive statistics and correlation analysis were employed to examine the characteristics of the variables, while panel data econometric techniques were applied for the main analysis. The fixed-effect results revealed that non-performing loans and bank size exert a significant negative impact on the financial performance of Nigerian banks, whereas capital adequacy, loan loss provisions, and liquidity ratio were not found to have significant effects. Based on these findings, the study recommends that management should design and implement credit policies that are closely aligned with profitability objectives, while also recognizing the implications of such policies for bank operations, asset quality, and risk exposure. Effective credit risk management is essential to minimize loan losses, reduce non-performing loans, and avoid financial distress. Furthermore, management should not focus solely on profit maximization but should adopt strategies that promote sound liquidity management, thereby minimizing excessive fluctuations in liquidity positions and ensuring long-term financial stability.

Keywords:       Credit Risk Management, Deposit Money Banks, Nigeria, Financial Performance.