Effect Of Non-Performing Loans On Commercial Banks’ Profit Performance In Nigeria

ABSTRACT

The study sought to find the effect of non-performing loans on commercial banks’ profit performance in Nigeria. Hence, the study used time series data spanning from 1997 to 2015. The study employed ordinary least square (OLS) multiple regression model to analysed data on profit after tax used to measure the performance of commercial banks, non-performing loan, substandard loan and doubtful loan generated from Zenith Bank annual reports covering the time frame reviewed. Following the results of the data analysis, it was found that non-performing loans has a significant effect on profit after tax (proxy for bank performance). Sub-standard loans have a negative and insignificant effect on commercial banks performance in Nigeria. Also, it was evident that doubtful loans had a negative and significant effect on commercial banks performance. Hence, the need for a strong policy on the management of banks’ credit facility was recommended, need for an immediate change in the banks’ management style and internal control system of the banks was also recommended. And lastly, need for a proper and well-articulated analyses over all collaterals presented for loans and advances was also suggested.

TABLE OF CONTENTS

Title ﾿ i

Declaration ﾿ ii

Certification ﾿ iii

Dedication ﾿ iv

Acknowledgements ﾿ v

Table of Contents ﾿ vi

List of Tables ﾿ viii

Abstract ﾿ ix

CHAPTER ONE ﾿ 1

INTRODUCTION ﾿ 1

1.1 ﾿ Background to the Study ﾿ 1

1.2 ﾿ Statement of Research Problem ﾿ 3

1.3 ﾿ Objectives of the Study ﾿ 5

1.4 ﾿ Research Questions: ﾿ 5

1.5 ﾿ Research Hypotheses ﾿ 6

1.6 ﾿ Significance of the Study ﾿ 6

1.7 ﾿ Scope of Study ﾿ 8

CHAPTER TWO ﾿ 9

REVIEW OF RELATED LITERATURE ﾿ 9

2.1 ﾿ Conceptual Framework ﾿ 9

2.1.1 ﾿ Concept of non-performing loans ﾿ 9

2.1.2 ﾿ Concept of financial performance ﾿ 10

2.1.3 ﾿ Essence of Non-Performing Loans (NPL) ﾿ 11

2.1.4 ﾿ NPLs and financial performance of Banks in Nigeria ﾿ 12

2.1.5 ﾿ Intermediation Function of Banks ﾿ 12

2.1.6 ﾿ Loan in the Banking Industry ﾿ 13

2.1.7 ﾿ Non-Performing Loans in Nigeria ﾿ 14

2.1.8 ﾿ Causes of Non-Performing Loans in Nigeria ﾿ 15

2.1.9 ﾿ Reducing levels of non-performing loans ﾿ 17

2.2 ﾿ Theoretical Framework ﾿ 18

2.2.1 ﾿ Theory of Asymmetric Information ﾿ 18

2.2.2 ﾿ Theory of life-cycle consumption ﾿ 19

2.2.3 ﾿ The Moral Hazard Theory ﾿ 19

2.2.4 ﾿ Adverse Selection Theory ﾿ 20

2.2.5. The Stewardship Theory ﾿ 20

2.3 ﾿ Empirical Review ﾿ 21

2.4 ﾿ Summary of Literature Review ﾿ 27

CHAPTER THREE ﾿

RESEARCH METHODOLOGY ﾿ 28

3.1 ﾿ Research Design ﾿ 28

3.2 ﾿ Area of the Study ﾿ 28

3.3 ﾿ Population of the Study ﾿ 29

3.4 ﾿ Sampling Technique ﾿ 29

3.5 ﾿ Nature and Sources of Data ﾿ 29

3.6 ﾿ Model specification ﾿ 29

3.6.1 ﾿ Description of Research Variables ﾿ 30

3.7 ﾿ Analytical Technique ﾿ 31

3.7.1 ﾿ Ordinary Least Square Technique ﾿ 31

3.7.2 ﾿ Coefficient of Multiple Determination ﾿ 31

3.7.3 ﾿ F-Statistics ﾿ 32

3.7.4 ﾿ t-Statistics ﾿ 32

CHAPTER FOUR

PRESENTATION OF DATA, ANALYSIS AND DISCUSSIONS ﾿ 33

4.1 ﾿ Presentation of Data ﾿ 33

4.2 ﾿ Data Analysis and Discussion of Results ﾿ 34

4.2.1 ﾿ Descriptive Statistic ﾿ 34

4.2.2 ﾿ Regression Analysis ﾿ 35

4.2.2.1 ﾿ Discussion of Results and Hypotheses Testing ﾿ 37

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND 

RECOMMENDATIONS

5.1 ﾿ Summary of Findings ﾿ 40

5.2 ﾿ Conclusion ﾿ 40

5.3 ﾿ Recommendations ﾿ 41

REFERENCE ﾿ 42

APPENDIX:  Descriptive Statistics, Regression Results, Linear regression,

  ﾿    Exponential, Semi log & Double log ﾿ 46