IMPACT OF LOAN QUALITY ON THE FINANCIAL PERFORMANCE INDICATORS OF BANKS IN NIGERIA
- BACKGROUND OF THE STUDY
The analysis of the financial statements of banks and, particularly, the measurement of their performance has received increased attention worldwide over the years. Beyond analysis however, a major concern is the development of an acceptable means of measuring the performance of the banks. In Nigeria, the banking industry, with an asset-base of over twenty trillion Naira, is the largest industry in the Nigerian financial sector and, for several decades, has played a key role in the intermediation process between surplus spending units (i.e. savers) and deficit-spending units (for consumption and investment) in Nigeria (CBN, 2015). In the same regard, the Central Bank of Nigeria (CBN), which is the apex regulatory body of the Nigerian financial sector, has, as one of its primary roles, the fostering of liquidity, solvency and a stable financial system. This function which is derived from the Act that established the CBN essentially implies a stable and efficient financial system that facilitates the intermediation process for economic growth and development. This is effected for the most part through deposit money banks.
The principal business activity for most deposit money banks is lending. As such, the loan portfolio is typically the largest asset and consequently the predominant source of revenue. However, it is also arguably the greatest sources of risk to a bank’s safety and soundness. Effective management of the loan portfolio’s credit risk requires that the board and management understand and control the bank’s risk profile and its credit culture. To accomplish this, they must have a thorough knowledge of the portfolio’s composition and its inherent risks as well as understand the portfolio’s product mix, industry and geographic concentrations, average risk ratings, and other aggregate characteristics. In the same way, they must be sure that the policies, processes, and practices implemented to control the risks of individual loans and portfolio segments are sound and that lending personnel adhere to them.
1.2. STATEMENT OF PROBLEM
For much time, good loan portfolio managers have concentrated most of their effort on prudently approving loans and carefully monitoring loan performance. Although these activities continue to be mainstays of loan portfolio management, analysis of past credit problems, such as those associated with oil and gas lending, agricultural lending, and commercial real estate lending in the 1980s, has made it clear that portfolio managers should do more.
1.3. RESEARCH OBJECTIVES
The major purpose of this research study is to establish the effect of loan quality on the returns that accrue to banks and their shareholders.
While other specific objectives includes:
- Determine the impact of loan quality on the return of assets of banks in Nigeria.
- Identify the impact of loan quality on the earnings per share of banks in Nigeria.
- Ascertain the impact of loan quality on the dividend per share.
1.4. RESEARCH QUESTION
The study will seek to answer the following research questions:
- What is the impact of loan quality on the return of assets of banks in Nigeria?
- What is the impact of loan quality on the earnings per share of banks in Nigeria?
- What is the impact of loan quality on the dividend per share?
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