The effect of credit risk management on performance of loan portfolios among listed commercial banks in Nigeria

Abstract

Credit risk management is a critical facet of banking operations, especially in a dynamic financial environment like Nigeria. The effectiveness of credit risk management profoundly influences the performance and stability of commercial banks, which are pivotal players in the nation's economic landscape. This study delves into the intricate relationship between credit risk management practices and the performance of loan portfolios in Nigerian commercial banks. The research employs multiple regression analysis and a panel data regression, utilizing a dataset derived from secondary sources. The study examines ten major commercial banks in Nigeria: Access Bank, Guaranty Trust Bank, United Bank for Africa (UBA), First Bank of Nigeria (FBN), Stanbic IBTC, Zenith Bank, Wema Bank, First City Monument Bank (FCMB), Sterling Bank and Union Bank which according to the market capitalisation represent ninety percent of the banking industry. Key independent variables include Loan Provision Coverage Ratio, Loan Loss Provision Ratio, Capital Control, Loan-to-Debt Ratio, and Loans-to-Total Asset Ratio. The study reveals compelling insights into the impact of credit risk management on loan portfolio performance. Notably, Loan Provision Coverage Ratio and Loan Loss Provision Ratio emerge as significant predictors, indicating that effective management of these ratios is paramount for maintaining a healthy loan portfolio. While other variables, including Capital Control, Loan-to-Debt Ratio, and Loans-to-Total Asset Ratio, do not exhibit statistically significant effects, their role in the broader credit risk management framework remains relevant. The findings underscore the critical importance of prudent credit risk management practices for Nigerian commercial banks. Effective management of Loan Provision Coverage Ratio and Loan Loss Provision Ratio is essential for mitigating loan portfolio risk and sustaining financial stability. The study also highlights the unique characteristics of each bank, suggesting that tailored risk management strategies are imperative. This research advocates for a comprehensive re-evaluation of credit risk management strategies within Nigerian commercial banks. Managers should prioritize the optimization of Loan Provision Coverage Ratio and Loan Loss Provision Ratio. Additionally, policymakers should consider the study's insights when crafting regulatory frameworks to enhance the resilience of the banking sector.