Macroeconomic and Bank-Specific Determinants of Non-Performing Loans in Nigeria

Abstract

Proper management of banks’ assets is the most sought panacea by bank managers in Nigeria. Lower quality of loans in the banking system can lead to higher loan loss provisions and affect banks’ capital adequacy ratios. This study examines how Non-Performing Loans (NPLs) of Nigeria’s Deposit Money Banks (DMBs) respond to selected macroeconomic and bank-specific determinants. Using the data within the sample period of 1981-2019 with Autoregressive Distributed Lag (ARDL) model, the study establishes that in the short-run, the level of NPLs in Nigeria is affected by these macroeconomic determinants namely, the unemployment rate (UNEMP), gross domestic products growth rate (GDPG) and exchange rate (EXRT) as well as bank-specific determinant (loan-to-deposit) ratio (LDR). However, in the long-run, GDPG and EXRT have a positive and significant influence on NPLs. The variables respond in line with our apriori expectation, however, unemployment, inflation and loans to deposits ratio are insignificant and appear not to affect NPLs in Nigeria in the long-run. The study recommends that government should ensure that the naira is properly managed as deterioration in its value portends a grave impact on the rate of non-performing loans. Also, improved infrastructures like good roads, water and power would enable the borrowers to fulfil repayment plans on time. A robust economy is important for borrowers to redeem their loan obligations in due time. This can be achieved by ensuring that loans assessed are channeled to more productive sectors of the economy.