Effect of Non-Performing Loans on the Profitability of Selected Development Finance Banks in Nigeria (Published)
This study looked at the effects of bad loans on the profits of development finance banks in Nigeria. The research used data from five major development banks including Bank of Industry, Nigerian Export-Import Bank, Nigerian Agricultural Cooperative Bank, Infrastructure Bank Nigeria, and Development Bank of Nigeria over a 15-year period from 2010 to 2024. The main goal was to find out if non-performing loans, loan loss provisions, interest income reduction, and loan concentration risk have any real effect on bank profitability measured by return on equity. The results showed that these development banks maintained steady but low profitability during the study period, with an average return on equity of 2.10% and ranging from 1.6% to 2.7%. Non-performing loans averaged 4.42% of regulatory capital across all banks, while loan loss provisions averaged 1.19% of total loans. The correlation analysis revealed strong negative relationships between profitability and both loan loss provisions (-0.907) and non-performing loans (-0.887). However, when the study used the more reliable fixed effects model, the results changed significantly. The Hausman test with a chi-square value of 99.334 and p-value of 0.000 confirmed that the fixed effects approach was the best method to use for this analysis. The study found that only loan concentration risk had a significant effect on return on equity (ROE) under the fixed effects model, with a positive coefficient of 0.008 and p-value of 0.010. This means that when banks focus their lending on certain areas, their profits go up slightly. This study concludes that loan loss provision, non-performing loans, interest income reduction, and loan concentration risk impact the return on equity (ROE) of Nigerian development finance banks. It suggests that individual bank management practices significantly influence these risks’ impact on profitability. Non-performing loans to regulatory capital have a significant negative effect on ROE, while interest income reduction rates vary among banks. Based on the conclusions, the study recommends that banks create tailored plans for loan losses, regularly adjust risk and profit plans, and establish strong systems to control bad loans. It also suggests exploring alternative income sources, such as new products, technology, and staff training, and focusing on specific sectors for better profits and risk control.
Keywords: Bank Profitability, Loan Loss Provisions, Non-Performing Loans, Return on Equity, interest income reduction, loan concentration risk