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Effect of Credit Management on the Profitability of Deposit Money
Banks in Nigeria
*Okeke Ijeoma Chinwe (Ph.D)
Department of Banking and Finance, Nnamdi Azikiwe University, Awka, Anambra State, Nigeria
*Corresponding Author
DOI : https://doi.org/10.51583/IJLTEMAS.2025.140400009
Received: 01 April 2025; Accepted: 09 April 2025; Published: 29 April 2025
Abstract: This study examines how credit management influences the profitability of deposit money banks in Nigeria. The research
is anchored on four specific objectives: (1) To analyze the effect of non-performing loans on bank profitability, ( 2) To examine the
effect of loan loss provisions on the profitability of deposit money banks, (3) To assess how loans and advances influence bank
profitability, and (4) To determine the effect of interest rates on bank profitability. Employing anex post facto research design, the
study utilizes secondary data spanning from 2002 to 2023. The analysis employs the ordinary least squares
( OLS) model to evaluate effects of credit management on bank profitability .Data were sourced from the Central Bank of Nigeria's
statistical bulletin (2024). The study identifies that non-performing loans have a significant and negative effects and loan
loss provisions have an insignificant and negative effect on profitability, whereas loans, advances, and interest rates exhibit a
significant and positive effects. Based on these findings, the study recommends that non-performing loans be rigorously
monitored and loan loss provisions minimized through enhanced risk management. Additionally, interest rates should be
strategically reviewed for creditworthy customers to optimize profitability.
Keywords: Credit management, Bank profitability, Loan, Interest
I. Introduction
The banking sector is integral to economic growth, serving as a financial intermediary between savers and investors. As custodians
of financial resources, banks facilitate economic activities by mobilizing deposits and extending credit. According to the Banking
and Other Financial Institutions Act (BOFIA) 2020, banks are responsible for accepting deposits, processing payments, granting
loans, and offering financial services. Deposit money Banks (DMBs) plays a vital role in ensuring a balanced flow of funds between
surplus and deficit units, maintaining liquidity while generating profits through interest on loans. Credit management
is crucial for banking stability and profitability , as poor credit practices lead to increased exposure to risks such as liquidity, credit,
and interest rate risks. Effective credit management strategies mitigate these risks and sustain profitability. Non-performing loans
(NPLs) are a key metric for assessing credit risk, as they represent loans in default for over 90 days. Rising NPL levels can erode
bank capital and investor confidence, making credit risk management essential. Proper assessment, approval, monitoring, and risk
control mechanisms ensure loan recoverability and safeguard financial stability. Bank loans is the greatest earning asset, most liquid
and highly risky. As a matter of fact a bank cannot remain in business if it neglects the credit function (Osayeme,2000 ). Therefore,
proper credit assessment, loan approval process, credit monitoring and control should be adopted in administering control loans to
borrowers to avoid bad debts or rising bad debts to analyze the borrower’s ability, books of accounts and collateral which if
overlooked can create increase on the effects on which it can pose in the banks, in turn endangers the reputation and confidence
held by the banks. The existence of the department for credit management oversees the processes of credit granting in
collaboration, with a good credit officer who has the ability to intelligently and resourcefully manage the borrowers credit lines
to mitigate these crises to maintain a healthy balance between risk and reward.
Practically, profitability and liquidity are effective indicators of corporate health and performance of not only the commercial banks,
(Eljelly,2004) but all profit-oriented ventures. These performance indicators are very important to shareholders and depositors who
are major publics of a bank . Hence, proper sound credit management practices should be implemented to avoid worsening credit
quality which is the most frequent cause of poor financial performance of banks. The prevalence of non-performing loans,
escalating bad debts, and loan losses are major threats to banking profitability. Many Nigerian banks have faced insolvency due to
poor credit management, as evidenced by the collapse of several banks in the 1990s and 2000s, including Heritage Bank. Recent
economic challenges, such as the COVID-19 pandemic, have further exacerbated loan defaults. Weak credit management structures
and inadequate collateralization have also contributed to rising NPL levels.
Central bank of Nigeria and other regulatory bodies have put in place constricted regulations to curb the challenges of credit
management and the profitability of banks. In spite of the constricted regulations put in place , the banking industry is still having
contests with high credit risk in the form of non-performing loans. Based on this, the study seeks to examine whether credit
management significantly affects the profitability of Nigerian banks , utilizing data from 2002 to 2023, a period characterized by
global economic fluctuations.
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Objectives of the Study
Primary aim of this study is to evaluate the influence of credit management on the profitability of deposit money banks in Nigeria.
Specific objectives include:
1. Examining the effect of non-performing loans on bank profitability.
2. Assessing the effect of loan loss provisions on deposit money bank profitability.
3. Examining the effect of loans and advances on profitability of deposit money banks.
4. Determining the effect of interest rates on bank profitability.
Hypotheses
H0 1:Non-performing loans have no significant effect on the profitability of deposit money banks .
H0 2 : Loan loss provisions have no significant effect on the profitability of deposit money banks .
H0 3: Loans and advances do not significantly affect the profitability of deposit money banks .
H0 4: Interest rates have no significant effect on profitability of deposit money banks.
II. Literature Review
Conceptual Review
Credit Management /Administration Credit management
Credit Management primarily involves investigating customers, deciding on the credit terms to be offered and keeping records of
outstanding accounts. On the other hand, credit administration refers to a loan administering. In some banks, a separate department
administers credit and serves as a watchdog over the banks loan portfolio, while in some others, the functions are concentrated in a
single department, but with well-defined checks and balances.
Theoretical Framework
The theoretical framework relating to this study anchores on Anticipated Income Theory: Anticipated Income Theory : This
theory was propounded by Prochnow (1949), and his approach was predicted on the premise that the loan applicants anticipated
income would serve as the source of repayment for the term loan. The loan is issued with the idea that repayment will be made in
installments from the debtors predicted cashflow, as opposed to a single payment upon expiration of the credit. As this will enable
the banks to provide high liquidity, when the cash inflows are regular and can be expected. Deposit-money banks can manage its
liquidity through appropriate credit management that is directing of granted loans, and ensuring that these loans are collected as at
when due in a timely manner and minimize the possibility of delays in repayment as the maturity date (Okoh, Nkechukwu and
Ezu,2016 ) . If this is considered a true source of bank loan repayment, it stands to reason that bank lending should not be restricted
to the traditional commercial loan theory; the important issue in bank lending is the borrower’s ability to repay the loan and their
future income constitutes the source for that
Empirical Review
Several studies have examined the effectof credit management strategies on the financial performance of Deposit Money Banks
(DMBs) in Nigeria and other countries. The following is a synthesis of relevant empirical literature on the subject.
Bala, Auwal, and Salisu (2022) studied how credit risks influence the profitability of Nigerian DMBs listed on the stock exchange.
Employing an ex-post facto research design, they selected eight out of twenty-four publicly traded DMBs and analyzed audited
financial statements covering the period from 2015 to 2019. Using Ordinary Least Squares (OLS) regression, their results suggested
that non-performing loans (NPLs) had an insignificant effect on the profitability of the sampled banks.
Similarly, Okafor, Okafor, and Isibor (2021) explored the relationship between loan management and the performance of DMBs in
Nigeria. Analyzing secondary data from the financial reports of three selected banks spanning 2000 to 2019, they employed OLS
regression to assess the relationship between non-performing loans and bank performance. Their findings indicated that return on
assets (ROA) had an inverse relationship with NPLs, whereas bank advances exhibited a positive correlation with ROA.
Enoch, Digil, and Arabo (2021) conducted a comparative analysis of credit risk management strategies and their outcomes in
Nigerian microfinance banks. The study utilized a multi-stage sampling technique, selecting 21 respondents from a population of
52 credit officers. Data were collected through questionnaires and analyzed using both descriptive and regression techniques. Their
findings underscored the necessity for microfinance banks to enhance their credit risk management frameworks to bolster
profitability.
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Acknowledging the pivotal role of banks in economic growth, Ayunku and Uzochukwu (2020) examined the relationship between
credit management and bad debts in Nigerian DMBs from 2014 to 2019. Utilizing correlation analysis and OLS regression, their
study concluded that credit management practices significantly influenced both ROA and Tobin’s Q.
Further, Folajimi (2020) assessed the impact of credit risk on the performance of Nigerian DMBs from 2006 to 2018, using
descriptive and regression analysis. The results suggested a positive association between credit risk and bank performance.
Similarly, Oke and Wale-Awe (2018) explored the relationship between credit risk and bank profitability in Nigeria. Their study
examined key financial metrics, including Return on Equity (ROE), loans and advances, loan loss provisions, and total assets.
Employing regression analysis, they found that credit risk did not exert a statistically significant impact on ROE.
Kajola et al. (2018) adopted the Generalized Least Squares (GLS) method to assess the effect of credit management on the financial
performance of Nigerian DMBs from 2005 to 2016. Their findings established a significant correlation between credit risk variables
and both ROE and ROA. Similarly, Olabamiji and Michael (2018) employed descriptive and regression techniques to analyze
primary data on credit management and bank performance. Their study indicated a positive relationship between credit management
and bank profitability.
Hamza (2017) examined the impact of credit risk management on the financial performance of Nigerian commercial banks using
pooled regression analysis. The study reported an inverse relationship between credit risk and profitability. Specifically, while the
Capital Adequacy Ratio (CAR) and loans and advances positively influenced ROA, variables such as Loan Loss Provision Ratio
(LLPR), Liquidity Ratio (LR), and Non-Performing Loan Ratio (NPLR) had a negative impact.
Ajayi and Ajayi (2017) adopted a panel regression approach to assess the effects of credit risk management on Nigerian DMBs
from 2001 to 2015. They utilized Profit After Tax (PAT) as a measure of bank performance, while NPLR, LLPR, Loan to Total
Asset Ratio (LTAR), and Cost per Loan Ratio (CPLR) were used as credit risk indicators. Their findings revealed that NPLR, LLPR,
and CPLR negatively affected bank profitability, whereas LTAR had a positive effect.
Ogbulu and Eze (2016) employed econometric methodologies such as ECM, Granger causality tests, IRF, and VDC to investigate
the impact of credit risk on the performance of Nigerian DMBs. Their data, sourced from the Central Bank of Nigeria (CBN)
Statistical Bulletin and NDIC Annual Reports from 1989 to 2013, revealed that credit risk variables significantly affected ROE,
ROA, and return on shareholders’ funds. However, the study found no significant Granger causality relationship between credit risk
indicators and bank performance, except for a unidirectional causality from ROE to RNPD and from ROTA to RNPS.
Li and Zou (2014) conducted a study on Asian commercial banks, investigating the relationship between credit risk management
and profitability using regression analysis. Their findings revealed that credit risk management positively influenced profitability,
with non-performing loan ratio, ROA, and ROE showing a positive relationship. However, the capital adequacy ratio exhibited a
negative and statistically insignificant correlation.
Other studies, such as those by Nwanna and Oguezue (2017), Ndubuisi and Amedu (2018), and Ojiong, Okpa, and Egbe (2014),
also explored various aspects of credit risk management and bank performance. Their findings generally indicated that effective
credit management could enhance bank profitability, while poor credit management, characterized by high non-performing loans,
could negatively affect financial performance.
Echobu and Okika (2019) analyzed data from 15 listed DMBs in Nigeria between 2006 and 2017. Using regression analysis, they
found that non-performing loans and impairment loan charge-offs had a significantly negative impact on bank performance.
Additionally, while capital adequacy negatively affected financial performance, the impact was not statistically significant.
In a study focusing on Turkish banks, Ekinci and Poyraz (2019) investigated the relationship between credit risk and financial
performance from 2005 to 2017. Their findings revealed that non-performing loans had a negative correlation with both ROA and
ROE. Similarly, Innocent, Ademola, and Teryima (2019) examined the combined effect of credit risk, capital adequacy, and
operational efficiency on Nigerian banks between 2008 and 2017, concluding that both credit risk and operational efficiency
negatively impacted financial performance.
Several other researchers, including Gabriel, Victor, and Innocent (2019), Okpala et al. (2019), and Philip and Abisola (2019), have
contributed to this discourse. Their findings consistently highlight the significant impact of credit risk on bank profitability, with
variations in the magnitude and direction of this impact depending on factors such as bank size, capital adequacy, and
macroeconomic conditions.
Otitolaiye (2020) investigated the relationship between credit risk and financial performance in Nigerian DMBs from 2006 to 2018.
Using return on capital employed (ROCE) and dividends paid (DPRS) as proxies for financial performance, and variables such as
NPLs, capital adequacy ratio, loan loss provisions, and loan-to-deposit ratio as indicators of credit risk, the study employed an ex-
post facto research design. The findings demonstrated that non-performing loans significantly and negatively affected ROCE and
DPRS, while capital adequacy had a significant positive effect on ROCE.
In summary, empirical studies indicate that credit risk management plays a crucial role in shaping the financial performance of
banks. While some studies suggest a direct positive relationship between credit risk and bank profitability, others highlight the
detrimental effects of poor credit management, particularly in cases of high NPL ratios. Overall, effective credit risk management
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strategies, such as robust loan monitoring and prudent credit policies, are essential for enhancing the financial stability and
profitability of banks.
III. Methodology
This study employs a time series analysis and OLS regression to examine the effect of credit management on bank profitability .
Data for non-performing loans, loan loss provisions, loans and advances, andinterest rate s were sourced from the Central Bank of
Nigeria statistical bulletin.
The regression model used is:
PBT = f(NPL, LLP, LAA, INT)
Where:
PBT = Profit Before Tax
NPL = Non-Performing Loans Ratio
LLP = Loan Loss Provisioning
LAA = Loans and Advances
INT = Interest Rate
In econometrics, the above equation 1 is not sufficient in specification due to the absence of the Constant Parameter and error term.
Therefore, we introduce the Constant Parameter and error terms
but firstly, state the mathematical model as follows:
PBT = NPL + LLP + LAA + INT …………………………………… (ii) PBTt=β0+β1NPLt+β2LLPt+β3LAAt + β4INT+ µt
………………….… (iii)
Where: The variables remain as explained above βo = Constant Parameter β1, β2, β3, β4, = Estimation parameters
µ = Error terms A priori β1> 0, β2>0, β3>0, β4> 0, β5> 0, β6>0 . Description of
Variables
Profit Before Tax: This is a financial metric that measures a company’s net profit before paying income tax.
Non-Performing Loans : Non-performing loans are those loans that are not earning income and full payment of principal and
interest is no longer anticipated, principal or interest is ninety days or more delinquent or the maturity date has passed and payment
in full has not been made
Loan Loss Provision: The guideline further states that licensed banks are required to make adequate provisions for perceived losses
based on the credit portfolio classification system prescribed above in order to reflect their true financial condition.
Deposit money banks’ Loans and Advances:
Advance can be in the form of overdraft, where a customer is allowed to withdraw money which exceeds his current account
balance, based on certain agreements between him and the bank. Interest Rate on Loans and Advances: These are rates set by the
federal reserve.
The probability that fluctuating interest rates will result in significant appreciation or depreciation of the value of and return from
the banks assets is known as interest rates risk. (Folpmers, 2022 ).
IV. Result and Discussions Data Analysis
The descriptive data of the variables are shown in table 1
Table 1: Descriptive Statistics
PBT
NPL
LLP
LAA
INT
Mean
342.1618
11.68045
665.8830
10740.17
24.90663
Median
406.7250
9.325000
392.6639
8819.601
25.21771
Maximum
982.8600
37.30000
1977.503
29045.64
30.60036
Minimum
-1377.000
3.010000
61.13100
954.6300
18.36250
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Std. Dev.
496.5257
8.724478
561.3968
7872.477
4.087856
Skewness
-1.747061
1.275516
0.672629
0.664216
-0.208284
Kurtosis
7.560300
4.282596
2.411350
2.673310
1.733882
Jarque-Bera
30.25479
7.473417
1.976542
1.715502
1.628535
Probability
0.000000
0.023832
0.372220
0.424115
0.442964
Sum
7527.560
256.9700
14649.43
236283.8
547.9458
Sum Sq. Dev.
5177293.
1598.447
6618495.
1.30E+09
350.9219
Observations
22
22
22
22
22
Source: Eviews 11 Descriptive Statistic Output, 2024
The descriptive statistics shown in table 1 reveals that profit before taxes of deposit money banks averaged N342.16bn per year
over the reviewed period. DMBs distributed an average loans and advances of N10,740.17bn annually from 2002 to 2023, with a
total of N236,283.8bn. Non-Performing loans ratio averaged an annual value of 11.68% annually with a minimum value
of 3.01% and a maximum value of 37.3%. The probability of the Jarque-Bera test statistic shows that except for profit before tax
and non-performing loans ratio, all the variables are normally distributed (p>0.05). Data Analysis The time series data were analyzed
using the OLS regression method Ordinary Least Square Regression The results of the OLS regression are shown in table 2. Table
2
Data Analysis
The time series data were analyzed using the OLS regression method
Ordinary Least Square Regression
The results of the OLS regression are shown in table 2.
Table 2: OLS Regression for NPL and PBT
Dependent Variable: PBT
Method: Least Squares
Date: 10/04/24 Time: 02:04
Sample: 2002 2023
Included observations: 22
Variable
Coefficien
t
Std. Error
t-Statistic
Prob.
NPL
-39.43730
8.157114
-4.834713
0.0001
LLP
-0.305875
0.236573
-1.292940
0.2133
LAA
0.044011
0.018992
2.317396
0.0325
INT
41.80310
19.60957
2.131771
0.0471
C
-196.1571
468.2402
-0.418924
0.6805
R-squared
0.724971
Mean dependent var
342.1618
Adjusted R-squared
0.660258
S.D. dependent var
496.5257
S.E. of regression
289.4119
Akaike info criterion
14.37030
Sum squared resid
1423907.
Schwarz criterion
14.61826
Log likelihood
-153.0732
Hannan-Quinn criter.
14.42871
F-statistic
11.20290
Durbin-Watson stat
1.492341
Prob(F-statistic)
0.000123
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Source: Eviews OLS Regression Output, 2024
The corresponding regression coefficients between NPL and PBT shown in table 2 (- 39.437) reveals that the ratio of non-
performing loans is negatively associated with the profit before tax of DMBs in Nigeria. It follows that every percentage increase
in the ratio of non-performing loans will likely coincide in a decrease of 39.44 billion naira in PBT of deposit money banks in
Nigeria.
The probability value of 0.0001 is less than 0.05 indicating that this relationship is significant. The matching regression coefficients
between LLP and PBT shown in table 2(-0.3058) reveals that the provision for loan losses is negatively associated with the profit
before tax of DMBs in Nigeria. The probability value of 0.2133 is greater than 0.05 which indicates that there is insignificant effect.
The corresponding regression coefficients between LLA and PBT shown in table 2 (0.44011) reveals that the value of loans and
advances is positively associated with the profit before tax of DMBs in Nigeria. By implication, every billion naira increase in the
loans and advances will likely coincide in an increase of 440.11 million naira in PBT of deposit money banks in Nigeria.
The probability value of 0.0325 is less than 0.05 indicating that this relationship is significant. The regression coefficients between
INT and PBT shown in table 2 (41.8031) reveals that the interest rate is positively associated with the profit before tax of DMBs in
Nigeria. It implies that every percentage increase in the interest rate will likely coincide in an increase of 41.8 billion naira in PBT
of deposit money banks in Nigeria . The probability value of 0 .0471 is less than 0.05 which is an indication that this association is
significant.
Test of Hypotheses
Hypothesis H0 1:
Nonperforming loans have no significant effect on the profitability of deposit money banks in Nigeria. The p-value for NPL on
PBT shown in table is 0.0001 which is less than 0.05. Therefore, Nonperforming loans have negative and significant effect
on the profitability of deposit money banks in Nigeria.
Hypothesis H0 2 :
Loan loss provisioning have no significant effect on the profitability of deposit money banks in Nigeria. The p-value for Ordinary
least square regression of LLP on PBT shown in table 2 is 0.2133 which is greater than 0.05. This indicates an acceptance of the
null hypothesis. Therefore, Loan loss provision have no significant effect on the profitability of deposit money banks in Nigeria
Hypothesis H0 3: Loans and advances does not have effect on the profitability of deposit money in Nigeria. The p-value
for Ordinary least square regression of LAA on PBT shown in table 2 is 0.0325 which is less than 0.05. This indicates a rejection
of the null hypothesis. Therefore, Loans and advances significantly affect the profitability of deposit money in Nigeria .
Hypothesis four: H0 4
Interest rate has no significant effect on the profitability of deposit money banks . The p-value for Ordinary least square regression
of INT on PBT shown in table 2 is 0.0471 which is less than 0.05.. Therefore, Interest rate has significant effect on the profitabilityof
deposit money banks .
V. Findings and Conclusions
Discussion of the Findings
The study sought to examine the effect of credit management on the profitability of deposit money banks in Nigeria. Credit
management was measured in terms of non- performing loan , Loan loss provision , loans and advances and interest rate while
profitability of DMBs was measured using Profit Before Taxes of deposit money banks in Nigeria. The findings of the study
revealed that , non-performing loan is negatively and significantly associated with the profit before tax of deposit money banks in
Nigeria . It is contradicting to the findings of Juba et al., (2022) which observed that non-performing loans (NPL) have an
insignificant influence on the profitability of deposit money banks in Nigeria . Likewise, Echobu and Okika (2019) found that show
that non-performing loans have negative and significant effect on the financial performance of banks.
The findings of the study also revealed that the loan loss provision has negative and insignificant effect on the profit before tax of
deposit money banks in Nigeria. This indicates that as banks profitability increases , their loan loss provisions decreases and it is
actually the increase in profitability that caused the decline in loan loss provision. It is also confirming the findings of Echobu and
Okika (2019) which found a negative association between loan provisions and the financial performance of deposit money banks in
Nigeria. The findings of the study revealed that as expected, loans and advances is positively and significantly associated with the
profit before tax of deposit money banks in Nigeria. The finding of the study also reveals that
a causal relationship exists between loans and advances and profit before tax of deposit money banks in Nigeria. This indicates that
banks profitability has significantly improved in times when more loans and advances were extended by the DMBs in Nigeria and
it is actually the increased extension of credit that has cause the improvement in profitability of DMBs in Nigeria. This finding
corresponds with the priori expectation of the researcher .
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It is also confirming the findings of Okafor et al., (2021) which observed that loans and advances have a positive and
significant influence on the profitability of deposit money banks in Nigeria . SUMMARY OF FINDINGS: ?
Non-performing loans have a negative and significant impact on profitability.?
Loan loss provisions negatively affect profitability, though insignificantly. ?
Loans and advances have a positive and significant effect on profitability. ?
Interest earnings on loans and advances positively influence profitability. The study concludes that effective credit management,
particularly through prudent lending and interest rate adjustments, is critical for banking profitability.
Recommendations
1. Banks should enforce prudential guidelines to limit non-performing loans and enhance profitability.
2. Loan loss provisions should be minimized through improved credit risk monitoring.
3. Deposit money banks should prioritize extending loans to creditworthy clients.
4. Interest rates should be adjusted to balance credit accessibility and profitability.
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