EFFECTS OF NON-PERFORMING LOANS ON THE PERFORMANCE OF LISTED DEPOSIT MONEY BANKS IN NIGERIA

JOHN BOB-MANUEL

Abstract


This study investigates the impact of non-performing loans (NPLs) on deposit money banks' (DMBs) performance in Nigeria, focusing on the role of capital adequacy, net interest income, and loan-to-deposit ratio in determining return on equity (ROE). The research utilizes panel data analysis, encompassing a sample of 5 Nigerian DMBs between 2018 and 2022, to explore the relationships between these variables. The study also incorporates empirical reviews of contemporary literature to provide a comprehensive understanding of the factors affecting bank performance. The findings reveal that capital adequacy has a significant positive effect on ROE, suggesting that well-capitalized banks are more efficient in generating income, leading to higher profitability. Net interest income also exhibits a significant positive relationship with ROE, indicating that banks with higher net interest income are better positioned to manage risks and maintain profitability. Conversely, the loan-to-deposit ratio does not show a significant impact on ROE in the Nigerian context. This outcome could be attributed to several factors, such as the high level of non-performing loans in the Nigerian banking sector, which may dilute the positive impact of lending activities on profitability. In conclusion, addressing the high NPLs levels and improving capital adequacy and net interest income can enhance the performance of Nigerian DMBs. The findings of this study offer valuable insights for policymakers, regulators, and financial institutions in Nigeria, emphasizing the need for prudent risk management and stringent capital requirements to ensure the stability and growth of the banking sector.

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