Non-Performing Loans and Profitability of Deposit Money Banks in Nigeria

Abstract

This study investigates the relationship between non-performing loans (NPLs) and the profitability of deposit money banks in Nigeria, specifically focusing over a 15-year period from 2009 to 2023. The primary objective is to assess how NPLs impact the bank's profitability, with sub-objectives examining the effect of non-performing loan ratio, growth rate, and coverage ratio on return on assets (ROA). The research employs a quantitative approach, utilizing secondary data sourced from Deposit Money Banks annual reports to analyze trends and correlations. Data collection involved extracting relevant financial metrics from Deposit Money Banks annual reports, including non-performing loan figures, total loans, loan loss provisions, net income, and total assets. The study employs descriptive statistics, correlation analysis, and regression models to examine the relationships between variables. The findings reveal that while non-performing loan ratio and coverage ratio significantly influence ROA, the growth rate of non-performing loans does not show a strong correlation with profitability. The correlation and regression analyses indicate that higher non-performing loans correlate negatively with ROA, suggesting that increasing NPLS adversely affect profitability. The study recommends that Deposit Money Banks enhance its risk management strategies to mitigate the negative effects of non-performing loans on profitability. It also suggests that regulators enforce stricter guidelines for loan provisioning and risk management to safeguard financial stability. Additionally, investors are advised to carefully monitor banks' non-performing loan metrics when making investment decisions. These measures aim to improve financial performance and stability within the banking sector. This research contributes valuable insights into the dynamics of loan management and profitability in the Nigerian banking sector, offering practical recommendations for improving financial health and performance.