credit risk

Australian Journal of Business and Management Research

Vol.2 No.02 [31-38] | May-2012

CREDIT RISK AND COMMERCIAL BANKS’ PERFORMANCE IN NIGERIA: A PANEL MODEL
APPROACH
KOLAPO, T. Funso (Corresponding Author)
Department of Banking and Finance,
Faculty of Management Sciences
Ekiti State University, Ado-Ekiti, Nigeria. [e-mail] AYENI, R. Kolade (Ph.D)
Department of Economics,
Faculty of Social Sciences
Ekiti State University, Ado Ekiti, Ekiti State, Nigeria. [e-mail] OKE, M. Ojo (Ph.D)
Department of Banking and Finance,
Faculty of Management Sciences
Ekiti State University, Ado Ekiti. Ekiti State, Nigeria. [e-mail]. ABSTRACT
The study carried out an empirical investigation into the quantitative effect of credit risk on the performance of commercial banks in Nigeria over the period of 11 years (2000-2010). Five commercial banking firms were selected on a cross sectional basis for eleven years. The traditional profit theory was employed to formulate profit, measured by Return on Asset (ROA), as a function of the ratio of Non-performing loan to loan &
Advances (NPL/LA), ratio of Total loan & Advances to Total deposit (LA/TD) and the ratio of loan loss provision to classified loans (LLP/CL) as measures of credit risk. Panel model analysis was used to estimate the determinants of the profit function. The results showed that the effect of credit risk on bank performance measured by the Return on Assets of banks is cross-sectional invariant. That is the effect is similar across banks in Nigeria, though the degree to which individual banks are affected is not captured by the method of analysis employed in the study. A 100 percent increase in non-performing loan reduces profitability (ROA) by about 6.2 percent, a 100 percent increase in loan loss provision also reduces profitability by about 0.65percent while a
100 percent increase in total loan and advances increase profitability by about 9.6

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