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Credit Risk Management and the Financial Performance of Deposit Money Banks: Some New Evidence

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  • Oritsegbubemi Kehinde Natufe

    (Both of the Department of Banking and Finance, Faculty of Management Sciences, Ugbowo Campus, University of Benin, Benin City 300103, Edo State, Nigeria)

  • Esther Ikavbo Evbayiro-Osagie

    (Both of the Department of Banking and Finance, Faculty of Management Sciences, Ugbowo Campus, University of Benin, Benin City 300103, Edo State, Nigeria)

Abstract

This study examined credit risk management and return on equity of Nigerian deposit money banks (DMBs) twelve (12) years (2010–2021) post-adoption of the common accounting year-end as mandated by the Central Bank of Nigeria (CBN) in 2009. Our data set comprises independent variables of capital adequacy ratio (CAR), liquidity ratio (LQR), loan-to-deposit ratio (LDR), risk asset ratio (RAR), non-performing loans ratio (NPLR), loan loss provision ratio (LLP), and size (SZ). Our dependent variable is the return on equity (ROE). Using a panel data regression analysis, we found that CAR, RAR, NPLR, and SZ are the significant determinants of ROE. We also found that Nigerian DMBs now significantly rely on offshore borrowings in Eurobonds to create risk assets to overcome CBN’s constriction on using local depositors’ funds to create risk assets. Furthermore, we found that shareholders of DMBs with international banking licenses in Nigeria within the study period were not significantly more compensated for their risk exposure than investors in risk-free assets (treasury bills). Therefore, the CBN should continue strengthening its regulatory functions with regular reviews that would compel improvements of the DMBs’ credit risk management systems to mitigate the likely failure of the credit life cycle of granted loans. Additionally, a review of its current regulatory cash reserve ratio of 37.5% is imperative to reduce DMBs’ dependence on offshore funding and its associated foreign exchange risk.

Suggested Citation

  • Oritsegbubemi Kehinde Natufe & Esther Ikavbo Evbayiro-Osagie, 2023. "Credit Risk Management and the Financial Performance of Deposit Money Banks: Some New Evidence," JRFM, MDPI, vol. 16(7), pages 1-23, June.
    • Handle: RePEc:gam:jjrfmx:v:16:y:2023:i:7:p:302-:d:1176141
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    References listed on IDEAS

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