ABSTRACT
The study sought to find the effect of non-performing loans on commercial banks’ profit performance in Nigeria. Hence, the study used time series data spanning from 1997 to 2015. The study employed ordinary least square (OLS) multiple regression model to analysed data on profit after tax used to measure the performance of commercial banks, non-performing loan, substandard loan and doubtful loan generated from Zenith Bank annual reports covering the time frame reviewed. Following the results of the data analysis, it was found that non-performing loans has a significant effect on profit after tax (proxy for bank performance). Sub-standard loans have a negative and insignificant effect on commercial banks performance in Nigeria. Also, it was evident that doubtful loans had a negative and significant effect on commercial banks performance. Hence, the need for a strong policy on the management of banks’ credit facility was recommended, need for an immediate change in the banks’ management style and internal control system of the banks was also recommended. And lastly, need for a proper and well-articulated analyses over all collaterals presented for loans and advances was also suggested.
TABLE OF
CONTENTS
Title i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table of Contents vi
List of Tables viii
Abstract ix
CHAPTER ONE 1
INTRODUCTION 1
1.1 Background to the Study 1
1.2 Statement of Research Problem 3
1.3 Objectives of the Study 5
1.4 Research
Questions: 5
1.5 Research Hypotheses 6
1.6 Significance of the Study 6
1.7 Scope of Study 8
CHAPTER
TWO 9
REVIEW
OF RELATED LITERATURE 9
2.1 Conceptual
Framework 9
2.1.1 Concept
of non-performing loans 9
2.1.2 Concept
of financial performance 10
2.1.3 Essence of
Non-Performing Loans (NPL) 11
2.1.4 NPLs and
financial performance of Banks in Nigeria 12
2.1.5 Intermediation Function of Banks 12
2.1.6 Loan in the Banking Industry 13
2.1.7 Non-Performing Loans in Nigeria 14
2.1.8 Causes of Non-Performing Loans in Nigeria 15
2.1.9 Reducing
levels of non-performing loans 17
2.2 Theoretical Framework 18
2.2.1 Theory of
Asymmetric Information 18
2.2.2 Theory of
life-cycle consumption 19
2.2.3 The Moral
Hazard Theory 19
2.2.4 Adverse
Selection Theory 20
2.2.5. The Stewardship Theory 20
2.3 Empirical
Review 21
2.4 Summary
of Literature Review 27
CHAPTER
THREE
RESEARCH
METHODOLOGY 28
3.1 Research Design 28
3.2 Area of the Study 28
3.3 Population of the Study 29
3.4 Sampling
Technique 29
3.5 Nature and Sources of Data 29
3.6 Model specification 29
3.6.1 Description of Research Variables 30
3.7 Analytical
Technique 31
3.7.1 Ordinary Least Square Technique 31
3.7.2 Coefficient of Multiple Determination 31
3.7.3 F-Statistics 32
3.7.4 t-Statistics 32
CHAPTER
FOUR
PRESENTATION
OF DATA, ANALYSIS AND DISCUSSIONS 33
4.1 Presentation
of Data 33
4.2 Data Analysis and Discussion of
Results 34
4.2.1 Descriptive Statistic 34
4.2.2 Regression Analysis 35
4.2.2.1 Discussion of Results and Hypotheses
Testing 37
CHAPTER
FIVE
SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATIONS
5.1 Summary of Findings 40
5.2 Conclusion 40
5.3 Recommendations 41
REFERENCE 42
APPENDIX:
Descriptive Statistics, Regression Results, Linear regression,
Exponential, Semi log & Double log 46
LIST OF TABLES
TABLE Page
4.1 Aggregate
data used for the analysis (1997 to 2015) 33
4.2 Descriptive Statistic 34
4.2 Regression Results (Dependent
variable, Profit after Tax) 36
CHAPTER
ONE
INTRODUCTION
1.1 Background
to the Study
No country can
experience financial growth and development without the establishment and
operation of well-functioning commercial banks. Commercial banks are special
intermediaries because of their unique capacity to finance production by
lending their own debt to agents willing to accept it and to use it as money
(Ayo, 2012). In Nigeria, the traditional role of a commercial banks is lending,
and loans constitute the bulk of their assets (Njanike, 2009). Eighty-five
percent of income generated by commercial banks in Nigeria is contributed by
interest on loans Adebisi and Matthew, (2010). Therefore, loans represent the
major aspect of commercial banks asserts, Saunders and Cornett, (2005). On the
other hand, (Chimpa, 2012) opines that lending or the giving of loans is not an
easy task for commercial banks, because it creates a big problem in the
operation and financial performance of commercial banks, this problem created is
called non-performing loans. Due to the nature of their business, commercial
banks expose themselves to the risks of default in contractual obligations from
borrowers (Waweru and Kalami, 2009).
According to Alton
and Hazen (2012) non-performing loans are those loans which are ninety days or
more and are no longer accruing interest. Hennie (2003) agreed that non-performing
loans are those loans which are not generating income. This is further
supported by Fofack (2005), who define non-performing loans as those loans
which for a relatively long period of time do not generate income that is, the
principal and or interest on these loans have been left unpaid for at least
ninety days. Non-performing loans are also commonly described as loans in
arrears for at least ninety days (Guy, 2011). Non-performing loan are those loans that are
not paid up as at when due. Caprio and Klingebiel (2006), suggest that
non-performing loans are those loans that do not generate income for a
relatively long period of time that is, the principal and or interest on these
loans have been left unpaid after the due dates of repayments.
Owing to the effect
of non-performing loans in the performance of commercial banks in Nigeria,
non-performing loans have been an immense issue among banking organizations and
academicians. At the most general level, a non-performing loan (NPL) is a loan
where a borrower is not making repayments in accordance with contractual
obligations. In many jurisdictions and for many firms, NPL is defined as a sum
of borrowed money upon which the debtor has not made his or her scheduled
payments for at least 90 days (Bholat et
al, 2016). NPLs are important because they affect the financial
intermediation role of commercial banks which constitutes the banks’ main
source of their income, and ultimately, the financial stability of an economy
(Klein, 2013). The immediate consequence of large amount of NPLs in the banking
system is bank failure as well as economic slowdown. The causes of non-performing
loans are usually attributed to the lack of effective monitoring and
supervision on the part of banks, lack of effective lenders’ recourse, weaknesses
of legal infrastructure, and lack of effective debt recovery strategies
(Adhikary, 2007).
In Nigeria, due to
the rising increase of non-performing loans, the CBN (2010) through its
prudential guideline, required licensed banks to periodically review their
credit portfolios continuously, at least once a quarter with a view to
recognizing any deterioration in credit quality and that a credit facility
should be deemed to be non-performing once any of the following conditions
exists; where Interest or principal is due and unpaid for 90 days or more and
interest payments equal to 90 days, interest or more have been capitalized
rescheduled, or rolled over into a new loan. Thus they classified
non-performing credit facilities into three categories namely, substandard,
doubtful or lost (CBN, 2010). The banking industry, according NDIC (2013)
annual statement and account show that the total loans and advances stood at
N10.043 trillion in 2013, showing an increase of 23.22 percent over N8.150
trillion granted in 2012, and that the non-performing loans to total loans
ratio improved from 3.51 percent in 2012 to 3.23 percent in 2013, this
according to the report was within the regulatory threshold of 5 percent.
However, in spite of this improvement, the volume of non-performing loans
increased by 13.30 percent from 281.09 billion in 2012 to 324.14 billion in
2013 (NDIC, 2013).
1.2 Statement of Research Problem
In recent time, different
studies have been conducted on factors affecting non-performing loans, problems
and prospects of banking sectors, causes and effects of non-performing loans.
But unfortunately, no particular study has been conducted on the effects of non-performing
loans on the performance of commercial banks in Nigeria, despite the increasing
rate of fraud, embezzlement and loan default for almost a decade. This
continuous neglect has put the entire banking sector in an embarrassing
situation.
It is averred that
all over the world, financial institutions face enormous risks of non-performing
loans (NPLs). Financial institutions
particularly commercial banks are very important in not only banking the low
income earners in the society, but also in advancing credit facilities to them.
However, just like other financial institutions, they experience many cases of
NPLs. Nonperforming loans are not only argued to adversely affect the financial
performance of financial institutions, but they also have other far reaching
implications. This is due to the fact that, other potential borrowers may fail
to access credit facilities since part of the funds that could be extended as loans by financial institutions are
still tied to NPLs.
Furthermore, non-performing
loans are increasing due to lack of proper risk management, which has threatened
the performance of banks. Most commercial banks in Nigeria are found to approve
the loans that are not well examined. This may further lead to increase in loan
defaults and non-performing loans. Thus, the existing procedures for loan
management are not adequate to compete with the existing financial and economic
challenges in Nigeria.
Moreso,
Bloem and Gorter (2001) opined that bank credit officers do not properly access
the sustainability of granting credit to their customers and that they do not
adhere to the good lending principles and all the affected banks display
similar symptoms such as insider abuse, poor monitoring of loan accounts, lack
of qualified staff, little or no cash flow appraisal of loan requests. This no
doubt has affected negatively the functionality of most financial institutions
operation in Nigeria.
Though most commercial
banks’ have clear and sound lending policies, the reality is that they have
been quite reckless in their lending activities. Coupled with this, is the
immense pressure particularly on government controlled banks to lend to
politically connected individuals and institutions regardless of their credit status,
showed that the greatest precipitator of the banking crisis in the late 1980s
and the 1990s were bad corporate governance and poor quality of loan assets.
NPLs involve a lot
of time, efforts and other related resources of bank
management. This is an indirect cost which the bank has to bear due to poor
asset quality. The NPLs do not only block the interest income, but they entail
a missed chance of investing in some return-earning investment, thereby
affecting future stream of profits accruable to commercial banks. NPLs imply
blocked income which constrains the bank of cash at hand. Banks are, therefore,
forced to borrow more and this results in additional cost to the bank. Thus,
affecting negatively their performance. Moreso, NPLs entail a reputational risk
to the bank. If a bank is facing problem of NPLs, then it adversely affects its
credit rating and would limit its opportunities of co-financing and syndication
with other banks. Thus, huge amount of NPLs affect the performance of
commercial banks and can threaten the survival and growth of commercial banks.
1.3 Objectives of the Study
The broad of the
study was to examine the impact of non-performing loans in the profit performance
of commercial banks in Nigeria. Hence, the below itemized specific objectives were
pursued:
i.
to ascertain the effect of doubtful loans
on the performance of commercial banks in Nigeria;
ii.
to assess the effect of sub-standard loans
on the performance of commercial banks;
iii.
to examine the effect of bad loans on the
performance of commercial banks in Nigeria.
1.4 Research
Questions:
i.
what effect does
doubtful loans have on the performance of commercial banks operating in
Nigeria?
ii.
what effect does sub-standard loans have
on the performance of commercial banks?
iii.
what is the effect of bad loans on performance
of commercial banks in Nigeria?
1.5 Research Hypotheses
The hypotheses of
the study, formulated in null form were itemized below:
Ho1: doubtful
loans do not have any significant effect on the performance of commercial banks operating in Nigeria;
Ho2: sub-standard loans do not
have any significant effect on the performance of commercial banks;
Ho3: bad loans do have any
impact on the performance of commercial banks in Nigeria.
1.6 Significance of the Study
The study provided
detailed information to creditors that will enable them to assess the credit
worthiness of Commercial Banks based on both financial losses and operational
losses reports without ignoring the later as it equally affects profitability
of financial institutions.
The
study made the investors recognize that the overall level of non-performing
loans equally affects their return on investment and hence not ignore the NPLs
element when making investment decisions.
The
study made the commercial banks managers and other top executives appreciate
the need to monitor and control non-performing loans as it equally affects the performance
though provisions made by the commercial banks.
The
staff involved in the day-to-day operating activities of commercial banks will draw
inference to the study in appreciating the need for controlling operational
losses as it affects profitability and their future benefits in the bank.
With
this study, the management consultants can advise on the best investment
decisions based on not only the financial losses position but equally
considering the inherent non performing loans as they also impact on the
profitability of commercial banks.
The
academicians will find the study useful as it will highlight areas for further
research and also it will contribute to new knowledge. Also the study will give
an insight of how the operational losses affect various stakeholders in the banking
sector. The academicians saddled with responsibility of disseminating vital
knowledge to various stakeholders on the effect of non-performing loans on
commercial banks will hence find this study useful when doing so.
The
outcome of this study would enable commercial banks operating in Nigerian
Banking industry to adopt feasible mechanisms to control the problem of a
growing non-performing loan portfolio in the institutions and thereby improve
its financial performance and profitability. The study would also be of benefit
to the Nigerian banking and non-banking financial sectors as a whole since the
financial and lending institutions in the country operate within the same
environment and deal with customers of similar characteristics.
And
lastly, the project could serve as a source of reference for other related
research works in the future. Thus, providing the basis for further research to
be carried out by potential researchers, who may desire to identify other
effects of non-performing loans on the performance of commercial banks that the
study was unable to identify due to limited time allotted to the study. Therefore,
the study would contribute immensely to the development and growth of commercial
banks which play a significant role in the economy.
1.7 Scope of Study
The
study focused on Zenith Bank Nigeria PLC; which is one of fast growing banks in
Nigeria. This is premised on the fact that the Bank has stable financial
statements, reliable enough to give the kind of academic insight the study
seeks to offer. Besides, the bank lends to almost all the major sectors of the
economy. Again, the nation-wide operation of the bank presents an opportunity
for a national outlook of the issues under the study. The study period covered
from 1997 – 2016. This choice of the time frame was necessitated because of the
recession experienced in the economy last few decades which affected the
ability of loan users to repay sought loans to commercial banks. Thereby,
increasing the doubtful loan and bad loans of this commercial institution.
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