The effect of risk management on the financial performance of commercial banks in Nigeria

Abstract

Using a panel vector error correction model (P-VECM), this study examined the shortand long-term impacts of credit risk, market risk, liquidity risk, and capital adequacy ratio (CAR) on the return on equity (ROE) of Nigerian commercial banks. The PVECM captured dynamic linkages and bidirectional causation across a panel of banks over a constrained period of time by taking into account non-stationarity and cointegration across variables. The results showed a mixed effect: market risk has a non-significant negative short-term effect but a significant positive long-term effect; liquidity risk has a non-significant negative short-term effect and a significant negative long-term effect; credit risk has a non-significant positive short-term and long-term impact on ROE; and CAR has a non-significant negative short-term effect and a significant negative long-term effect. These findings, which emphasized Nigeria's unstable economic environment (such as inflation and naira depreciation), are somewhat consistent with other research. In order to evaluate these risk-performance dynamics and provide insights for policy and risk optimization in Nigerian banking, the study emphasized the importance of Enterprise Risk Management (ERM).