Running Title:
Non-Performing Loans and Profitability of Nigerian Commercial Banks
Abstract
The persistent growth of non-performing loans (NPLs) remains a significant threat to the stability and profitability of commercial banks worldwide. In Nigeria, commercial banks face heightened challenges due to fluctuating economic conditions, unstable foreign exchange rates, and weak credit risk management practices that often result in loan defaults. This study investigates the relationship between non-performing loans and the profitability of commercial banks in Nigeria, with particular emphasis on how credit risk management moderates this relationship. Using a quantitative research design, the study analyzes secondary data from annual financial statements of selected Nigerian commercial banks over a defined period, complemented by regulatory reports from the Central Bank of Nigeria (CBN). Profitability indicators such as Return on Assets (ROA) and Return on Equity (ROE) are employed as dependent variables, while the ratio of non-performing loans to total loans serves as the key independent variable. Preliminary findings suggest that high levels of NPLs significantly reduce profitability, undermining banks’ ability to expand credit and threatening financial stability. However, effective credit risk management strategies—such as stringent loan appraisal processes, continuous monitoring, and regulatory compliance—can mitigate the adverse effects of NPLs on profitability. The study contributes to policy discourse by highlighting the need for enhanced credit evaluation frameworks, improved debt recovery mechanisms, and stronger risk management culture in Nigerian commercial banks. The implications are relevant for bank managers, regulators, and policymakers seeking to balance profitability with financial stability.
Keywords: Non-Performing Loans, Profitability, Commercial Banks, Credit Risk Management, Nigeria, Financial Performance
