Capital Regulatory Policy and Non Performing Loans of Commercial Banks in Nigeria

Abstract

An efficient and sound financial system is crucial to enhancing sustainable economic growth in any country, as it provides a balance between those who have funds to invest and those in need of these funds. The creation of credit is a source of revenue for banks just as it makes up the majority of bank’s assets. This is however a very risky outcome, as there is the risk of insolvency if less return is earned from its credit portfolio. The interest gotten from risk assets contributes significantly to interest income of banks, and about 85% of banks total income, thus exposing banking business to credit risk. When banks are exposed to high credit risk, it could lead to loans becoming non-performing and putting banks at high risk. Thus, regulatory policies are established to enable banks and other financial institutions have enough protection when carrying out their functions. In lieu of these, this study is carried out to examine the effect of capital regulatory policies on non-performing loans of commercial banks in Nigeria. Data on a sample of 15 commercial banks quoted on the Nigerian Exchange Group as at 31st December 2021 were analyzed using the panel regression models. The results showed a positive and significant effect between capital regulatory policies and non-performing loans of commercial banks. The study also showed that banks in Nigeria were able to survive high rate of non-performing loans because they were able to take the policies set out by the regulatory bodies into consideration. Based on the findings, the study advised the need for commercial banks to strictly adhere to the capital regulatory policies of government to be able to operate efficiently and effectively in a harsh economy like Nigeria.