Credit Risk Measures of Quoted Manufacturing Firms in Nigeria: Further Findings

Abstract

This study examined credit risk measures and financial performance of quoted manufacturing firms (QMFs) in Nigeria  for the period 2008-2020. Annual secondary series was sourced from audited financial reports of 16 QMFs; making a  total of 208 observations. The independent variables used to measure credit risk are default risk, operational risk and  recovery risk while the dependent variable, return on asset, is a measure for financial performance. Unit root test was  applied to test for stationarity of the variables, Hausman test for independency of the explanatory variables from random effects, and the Fixed Panel Ordinary Least Square (POLS) to test for the relationship between the variables, at  the 5% level of significance. From the estimation, the panel unit root test show that all the variables are integrated at  level. The Hausman test shows that the random effects are correlated with the explanatory elements. The Fixed POLS  show that default and exposure risks are negative but statistically significant; while recovery risk shows negative and  insignificant association with ROA. In conclusion, default risk and exposure risk are the key underlying credit risks facing  QMFs in Nigeria. Subsequently, the study recommends that manufacturing firms should seek out credit insurance on  their invoices, or ensure guaranteed payment using banks as third parties or adopt early short term payments by giving  discounts to their customers or the use of debt factoring. Secondly, proper and thorough credit analysis should be  conducted on current and new customers before extending credit to them. As regards exposure risk, payments for  transactions should be hedged against inflation and exchange rate risk; more so, manufacturing firms should design  friendly and flexible credit policies based on industry standards or competition to ensure clients are accountable.