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Non-performing Loan and its Effects on Banking Stability: Evidence from National and International Licensed Banks in Nigeria

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  • Atoi, Ngozi Victor

Abstract

This study examines Non-Performing Loan (NPL) and its effects on the stability of Nigerian banks with national and international operational licenses from 2014:Q2 to 2017:Q2. A “restricted” dynamic GMM is employed to estimate the macroeconomic and bank specific drivers of NPL for each licensed category. Z-Score is constructed to proxy banking stability, and its response to shocks NPLs is examined in a panel vector autoregressive framework. The results reveal that drivers of NPLs vary across the two categories of banks, but, weighted average lending rate is a vital macroeconomic driver of NPLs for both. The results also confirm the moral hazard hypothesis and risk-return trade-off of efficient market theory. Furthermore, international banks withstand NPLs shocks in the long run, despite temporary flux in the short horizon, while the stability of national banks is susceptible to NPLs shocks in the long run. The study recommends that weighted average lending rate, anchored on monetary policy rate should be the focus of banks’ regulators when addressing issues of NPLs. Again, strategies for mitigating short run impacts of NPLs on the stability of international licensed banks should be incorporated in the off-site regulatory framework to ensure banking stability.

Suggested Citation

  • Atoi, Ngozi Victor, 2018. "Non-performing Loan and its Effects on Banking Stability: Evidence from National and International Licensed Banks in Nigeria," MPRA Paper 99709, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:99709
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    Cited by:

    1. Segun Thompson Bolarinwa & Richard Olaolu Olayeni & Xuan Vinh Vo, 2021. "Is there a nonlinear relationship between nonperforming loans and bank profitability? Evidence from dynamic panel threshold," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(3), pages 649-661, April.
    2. Segun Thompson Bolarinwa & Olawale Akinyele & Xuan Vinh Vo, 2021. "Determinants of nonperforming loans after recapitalization in the Nigerian banking industry: Does efficiency matter?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(6), pages 1509-1524, September.
    3. Patrick Omoruyi Eke & B. Uzoma Achugamonu & Simon Yunisa & Godswill Osagie Osuma, 2020. "Macroeconomic risks and financial sector stability: the Nigerian case," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 47(3), pages 233-249, September.
    4. Odongo, Maureen & Misati, Roseline Nyakerario & Kageha, Caren & Wamalwa, Peter Simiyu, 2023. "Sustainable financing, climate change risks and bank stability in Kenya," KBA Centre for Research on Financial Markets and Policy Working Paper Series 71, Kenya Bankers Association (KBA).
    5. Candida Ferreira, 2023. "The Influence of Bank Performance, Market Condition and Economic Growth on Non-Performing Loansa," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 9(1), pages 77-98, June.
    6. Blessing Katuka & Calvin Mudzingiri & Edson Vengesai, 2023. "The effects of non-performing loans on bank stability and economic performance in Zimbabwe," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 13(6), pages 393-405.
    7. Phuong Anh Nguyen & Thi Thuy Trang Dinh, 2021. "Factors Affecting Bank Risks in Vietnam," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 13(10), pages 1-42, September.

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    More about this item

    Keywords

    Banking System Stability; Non-performing Loan; Panel Generalized Methods of Moments; Panel Vector Autoregressive;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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