Effect of Credit Risk on the Financial Performance of the Deposit Money Banks in Nigeria

Abstract

Available statistics show that the movement in the financial performance of the Nigerian banking industry appears
to be secular, highly volatile, and unpredictable, which calls for empirical investigation. This study, therefore,
examines the effect of credit risk on the financial performance of the Nigerian banking industry, using a semi-annual
time series data from 2008- 2022 and the Cochrane-Orcutt time-series regression technique. The major findings
indicate that capital adequacy ratio (CAR) has a significant negative effect on financial performance, asset quality
and management efficiency has no significant effect on financial performance, earnings quality has a positive and
significant effect on financial performance, liquidity proxy by the ratio of core liquid asset to total asset has a
positive and significant effect on financial performance, and liquidity proxy by the ratio of core liquid asset to total
current liabilities has a negative but significant effect on return on equity as an indicator of financial performance.
The study concludes that different measures of credit risk have different implications for the financial performance.
The study recommends that banks should trade-off the benefit of CAR such as managing credit risk with the
financial loss of losing earnings. The study also recommends that banks should adhere strictly to the principle of
corporate governance and banking regulations when granting loans.