CREDIT RISK MANAGEMENT PRACTICES AND LOAN DEFAULT OF LISTED DEPOSIT MONEY BANKS IN NIGERIA

Abstract

Loan default remains a major challenge to banking-sector stability because deterioration in loan quality can weaken profitability, capital adequacy and the capacity of deposit money banks to sustain financial intermediation. This study examines the effect of credit risk management practices on loan default among listed deposit money banks in Nigeria. Specifically, the study investigates the effects of capital adequacy, loan loss provisioning, credit appraisal and monitoring, loan portfolio diversification, and prudential compliance on loan default. The study adopts an ex-post facto research design and uses secondary data obtained from the audited annual reports of ten listed deposit money banks covering 2014–2023, resulting in 100 balanced bank-year observations. Loan default is measured by the Non-Performing Loan Ratio, while Capital Adequacy Ratio, Loan Loss Provision Ratio, Loan-to-Deposit Ratio, Loan-to-Total Asset Ratio and Bank Size constitute the explanatory variables. Fixed Effects regression with bank-level clustered standard errors is employed following the Hausman specification test. The findings show that capital adequacy, loan loss provisioning and loan-to-deposit ratio have positive and statistically significant effects on loan default, while loan-to-total asset ratio has an insignificant effect. Bank size has a negative and significant effect on loan default. The model explains 48.7% of the variation in loan default and is statistically significant. The study concludes that regulatory capital compliance and credit expansion alone are insufficient to control loan default and recommends stronger borrower screening, continuous loan monitoring, forward-looking provisioning and risk-based regulatory supervision.