Macroeconomic Variables and Nonperforming Loans of Quoted Commercial Banks in Nigeria

Abstract

This study examined the effect of macroeconomic variables on nonperforming loans of quoted commercial banks in Nigeria. Cross sectional data were sourced from financial statement of the quoted commercial banks while time series data were sourced from Central Bank of Nigeria Statistical Bulletin. Nonperforming loans was modeled as the function of real interest rate, exchange rate, broad money supply, real gross domestic product and inflation rate. Panel data Ordinary Least Square, fixed effect model was used after Hausman test. R-square, adjusted Rsquare, T-statistics, p-value, Durbin Watson and regression coefficient were used to examine the dynamic effect of macroeconomic variables on nonperforming loans. The study found that 85.8 percent of the variations in the nonperforming loans of the commercial banks were explained by variation in Nigeria macroeconomic variables as modeled in the regression. Exchange rate have negative and no significant effect, interest rate positive and significant effect, inflation rate have positive and no significant effect, real gross domestic product have negative and no significant effect while broad money supply have negative and no significant effect on nonperforming loans of the quoted commercial banks. From the findings, the study concludes that macroeconomic variables have strongly effect on nonperforming loans of the quoted commercial banks. The study recommends that government should direct their monetary and fiscal policies towards curbing the exchange rate by creating an enabling environment for credits expansion. To minimize the incidence of nonperforming loans, the authorities should create encouraging environment to further improve on the nation’s exchange rate. Sound credit management will achieve banking growth in Nigeria by Central Bank of Nigeria frequently assessing the lending habit of deposit money banks in Nigeria. This suggests that the supervisory authorities should ensure that the lending rate of interest charged on loans by commercial banks is realistic to enable borrowers conveniently repay the borrowed funds and government should control inflation rate which will improve on national price stability, controllable inflation accelerates employment increase, and aggregate output and income increase which will unexpectedly result to low rate of loan defaulters.