BUSINESS CYCLE, SOLVENCY RISK AND LOAN LOSS PROVISIONING IN NIGERIAN BANKS

Abstract

This study examined the effects of business cycle conditions and capital adequacy on loan loss provisioning in listed Nigerian deposit money banks over the 2014–2024 period, spanning both the pre- and post-IFRS 9 impairment regimes. A quantitative ex post facto design was adopted using balanced panel data from 12 banks, yielding 132 bank-year observations, and the relationships were estimated with a fixed-effects panel regression model with clustered robust standard errors. Business cycle conditions, measured by annual GDP growth rate, had a positive and statistically significant effect on loan loss provisioning (β = 0.019, p = 0.019), indicating that Nigerian banks provisioned more aggressively during periods of economic expansion — a counter-cyclical pattern that departs from the procyclical behaviour documented in developed banking systems. Capital adequacy ratio similarly had a positive and significant effect (β = 0.025, p = 0.039), consistent with the view that well-capitalised banks are better positioned to recognise credit losses earlier and more conservatively. Non-performing loans were the strongest determinant of provisioning (β = 0.259, p < 0.001), while profitability had a negative but statistically insignificant effect (β = −0.048, p = 0.164). The study concludes that loan loss provisioning in listed Nigerian deposit money banks reflects not only underlying credit risk but also broader macroeconomic conditions and bank capital strength, with provisioning serving both a risk-recognition and a forward-looking balance-sheet management function. Prudential regulators, audit committees, and bank management should give greater attention to the macroeconomic assumptions and capital-related considerations embedded in expected credit loss estimates.