Non-Performing Loans and Deposit Money Bank’s Profitability

Abstract

This study is to analyse the problem of non-performing loans on deposit money banks' profitability in Nigeria between the periods of 1990-2020. The data used for this study was derived from the Central Bank of Nigeria Statistical Bulletin Annual Reports and the Nigerian Deposit Insurance Corporation for a period of 31 years (1990-2020). The variable from which data were sourced which includes two dependent variables namely, return on assets (ROA) and return on equity (ROE). It was revealed that persistent increase in non-performing loans results in poor performance of deposit money banks in Nigeria, non-performing loan reduces deposit money banks' return on asset. And fire independent variables namely; Total Loans and Advances (TLA), Non-Performing Loans (NPL), provision error model for loan losses (PLL), lending rate (LDR) and Inflation Rate (INF). The Autoregressive distributed lag (ADRL) Approach to co-integration analysis was obtained employed in the analysis of the data in order to check for the existence of a long-run relationship between the variables. The statistical method used for this approach to test the integration analysis was vector error correction model (VECM). The estimated results from all the models indicate that non-performing loan ratios show a statistically significant but negative influence on deposit money banks' profitability. The study therefore recommends that deposit money banks should employ competent risk managers who always use their skills to reduce the incidence of non-performing loans in deposit money banks in Nigeria, amongst others, that effective credit policy that is reflected in flexible tenure, restructuring of credit terms, and monitoring the end use of funds given to their customer should be adopted. This will help reduce the tempo of non-performing loans thereby increasing deposit money banks' profitability in Nigeria.