Credit risk management and performance of deposit money banks in Nigeria

Abstract

This study investigates the relationship between credit risk management and the performance of Deposit Money Banks (DMBs) in Nigeria over the period 2006-2016 using the dynamic Generalized Method of Moments (GMM) and Granger causality techniques. The empirical results revealed a direct and statistically significant relationship between DMBs credit risk management variables measured by capital adequacy ratio, liquidity ratio, non-performing loan ratio and loan loss provision ratio and performance measured by return on asset. However, there is a significant inverse relationship between liquidity ratio and DMBs performance which is an indication that excess liquidity not properly managed as credit facility will eventually leads to a reduction in the financial performance of DMBs. The study recommends that rigorous credit risk management practice is of utmost importance to ensure long term survival of banks in their turbulent operating environment. Besides, Nigeria DMBs need to devise strategies that will limit the banks’ exposition to credit risk and improve their performance and competitiveness.

Keywords: Credit Risks; Performance; Deposit Money Banks; ROA; GMM