Effect Of Non-Performing Loan On The Performance Of Selected Commercial Banks In Nigeria

Abstract

This study examined the effect of non-performing loans on the performance of selected commercial banks in Nigeria. Specifically, it analyzed the impact of total bad debts, liquidity ratio and capital adequacy ratio on bank performance, measured by return on equity. The study covered eight selected commercial banks in Nigeria, namely Wema Bank, Guaranty Trust Bank, First Bank of Nigeria, United Bank for Africa, Fidelity Bank, Zenith Bank, Unity Bank and First City Monument Bank, using quarterly data from 2014 to 2025. Secondary data were obtained from bank financial statements, Central Bank of Nigeria publications and other relevant sources. The study employed descriptive statistics, correlation analysis, panel unit root tests, Kao and Johansen Fisher panel cointegration tests, and the panel Autoregressive Distributed Lag model. The unit root results showed mixed stationarity among the variables, while the cointegration tests confirmed a long-run relationship among return on equity, non-performing loans, total bad debts, liquidity ratio and capital adequacy ratio. The panel ARDL results showed that non-performing loans had a positive and significant effect on bank performance in both the short run and long run. Total bad debts had a positive but insignificant effect, while liquidity ratio had a positive and significant long-run effect. Capital adequacy ratio had a negative and significant long-run effect on performance. The study concludes that credit-risk conditions, liquidity management and capital structure are important determinants of commercial bank performance in Nigeria. It recommends stronger credit appraisal, improved loan monitoring, effective recovery systems, optimal liquidity management and efficient capital deployment.