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IMPACT OF BANK-SPECIFIC
FACTORS AND MACROECONOMIC VARIABLES ON NONPERFORMING LOANS OF LISTED DEPOSIT
MONEY BANKS IN NIGERIA
CHAPTER
ONE
INTRODUCTION
1.1
Background to the Study
The
financial sector in Nigeria plays crucial roles in economic growth and development by virtue
of its financial intermediation roles which includes savings mobilization, risk
management, project evaluation among others. Channelling of funds from
depositors (surplus units) to investors (deficit units) is a key role played by
banks (Negera, 2012). To ensure sustainability and profitability, banks procure
cheaper loanable funds from customers‟ deposits, and lend these funds to
borrowing customers at a relatively higher rate of interest (lending rates)
than that paid to the depositors (deposit interest rates) (Warue, 2013). One of
the difficulties in lending is the precise prediction of whether a loan and
interest will be paid back in full. This implies that lending involves credit
risk especially default risk. Banks use diverse internal techniques such as
client screening to minimize their level of loan default (Warue, 2013). The
causes for loan default vary in different countries and have a multidimensional
aspect both in developing and developed countries. Theoretically, there are so
many reasons as to why loans fail to perform which maybe in terms of internal
factors (some of this include Capital Adequacy Ratio, Loan Loss Provision and
Loan to Total Asset Ratio among others) or external factors (such as Exchange
Rate and Crude oil Prices among others) (Negera, 2012).Bank-specific factors
involve those factors that are peculiar to the operation of the bank and it can
be manipulated by the bank while the macroeconomic variables are those
variables that are beyond the control of any individual bank and affect all
bank in the system. It is quite natural that banks try to lend in safe ventures
at one hand and to increase the profitability on the other hand. Therefore, the
banks are usually extremely vigilant when it comes to giving loans at a riskier
avenue because the situation can be financially inviable if a large amount of
loans default is involved, which can ultimately lead to the insolvency of the
banks as a result of the failure of their borrower to pay back the principal
and interest as at when due and increase the level of non-performing loans in
the industry. Nigerian banking sector has experienced a number of bank failures
with non-performing loans becoming the precursor to eventual bank failures in
Nigeria(CBN, 2014). Basel committee (2001), defines Non-performing Loans asthe
total amount of money borrowed and which the borrower has been unable to
fulfill his or her debt obligations within 90 days after the maturity date for
repaying the principal or interest due on the loans. Assets quality of the
bank, measured in terms of the ratio of non-performing loans (NPLs) to gross
loans, weakened in the first half of 2016 deteriorating by 6.4 percentage to
11.7 per cent at end-June 2016(CBN financial report 2016). Researchers such as
Warue, (2013),Zhang and Daly (2013) and Etale,Ayunku andEtale (2016), among
others explain NPLs as bad debts whose recovery is highly doubtful as they are
not being serviced as required. In the banking system, bad loan problems
consist of a stock component (old debt) that is not performing and a flow
component (new lending) that may become non-performing (Clementina & Isu
2014). Extracts of the bank financial statements show that the NPLs grew from
N363.31 billion in 2014 to N649.63 billion in 2015 and N 1.678 trillion at
end-June 2016 (CBN, 2016). The Total banks loans as at the end of 2015 was
N13.1 trillion, up by a miserable 1.5 per cent against N12.9 trillion in 2014
and rose to 16.372 trillion in 2016. Giving a breakdown of the figures, the
Central Bank of Nigeria (CBN) observes that in the industrial segment, oil and
gas firms‟ aggregate credit stood at N2.153 trillion as at March 2015, compared
to N2.3 trillion in February 2015 and N2.047 trillion as at December 2014 and
3.307 at end of 2015. Nigeria oil and gas sector accounted for the largest
percentage of bank loans and advances which may be as a result of the over
dependence of Nigeria government on oil and gas sector and banks usually direct
their credit to the economy main source of revenue(CBN, 2016). The increase in
the NPL ratio maybe attributed largely to either bank-specifics (Loan to total
asset ratio, loan loss provision and capital adequacy ratio) or macroeconomics
variables (exchange rate and crude oil prices) (Amugo, 2015). For instance, the
price of Nigeria‟s crude oil fell by about 60 per cent to US$38.22 at
end-December 2015 from US$62.01 at end-June 2015, and this reduced Government
revenue and strained fiscal positions.
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