CAUSALITY BETWEEN FINANCIAL PERFORMANCE AND CREDIT RISK MANAGEMENT: EVIDENCE FROM DEPOSIT MONEY BANKS IN NIGERIA

Abstract

Credit risk management has become a critical concern affecting deposit money banks in Nigeria. Ineffective credit risk may be a serious factor contribution to poor performance of these banks, therefore, the causal nexus between credit risk management and the financial performance of deposit money banks is investigated from 2015-2024. Using audited financial data from 15selected deposit money banks in Nigeria from 2015 to 2024. The study employ Dumitrescu–Hurlin (2012) Panel Granger Causality Test, the results are evident that loan provision ratio granger causes return on asset of the deposit money banks in Nigeria. The result indicates a bi-causal co-movement between the cash reserve ratio and the return on asset of the deposit money banks in Nigeria. Furthermore, the result suggest that only a uni-directional causality exist between the ratios of non-performing loans to the return on equity. Also, causality only moves from return on equity to the loan to deposit ratio. The study concluded that that loan provision ratio truly granger causes return on assets of the deposit money banks in Nigeria. This study recommends that to abate excessive risk taking, deposit money banks should strengthen their loan loss provisioning practices, maintain optimal liquidity and reserve balances and integrate profitability metrics into their credit risk management framework.