Dynamic Effects of Credit Risk Indicators on the Financial Stability of Commercial Banks in Nigeria: An ARDL Bounds Test Analysis

Kingdom Nwuju; Sabinus Nnamdi Nwanneako; Ifeoma Better LekaraBayo; Raphael Tumini Pepple

doi:10.56201/ijasmt.vol.11.no8.2025.pg81.98

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Dynamic Effects of Credit Risk Indicators on the Financial Stability of Commercial Banks in Nigeria: An ARDL Bounds Test Analysis

Kingdom Nwuju, Sabinus Nnamdi Nwanneako, Ifeoma Better LekaraBayo, Raphael Tumini Pepple

Abstract

The profitability and stability of commercial banks in Nigeria are closely tied to how effectively they manage credit risk within an increasingly volatile financial environment. This study investigated the short-run and long-run effects of credit risk management indicators: Non- Performing Loan Ratio (NPLR), Loan Loss Provision (LLP), and Capital Adequacy Ratio (CAR), on the performance of Nigerian commercial banks, measured by Return on Assets (ROA). Secondary data were obtained from the audited financial statements of 20 commercial banks covering the period 2005 to 2024. Using the Autoregressive Distributed Lag (ARDL) model, supported by diagnostic and stability tests confirming model adequacy, the ARDL (4,3,0,0) results revealed that ROA(-1) (0.2717, p < 0.01) and ROA(-2) (0.6577, p < 0.01) had strong positive and significant effects, indicating persistence in bank profitability. In the short run, NPLR had a mixed but significant effect on ROA, with current NPLR (0.0010, p < 0.05) showing a mild positive influence, while its first lag (-0.0013, p < 0.01) exerted a negative effect, suggesting that increases in non-performing loans reduce profitability over time. LLP (0.0234, p > 0.05) and CAR (-0.0010, p > 0.05) were statistically insignificant, implying delayed effects on profitability. The ARDL bounds test produced an F-statistic of 7.463, which exceeded the upper critical bound of 4.66 at the % significance level, confirming a long-run cointegrating relationship among the variables. This finding indicates that credit risk management and bank profitability are interlinked over time, reinforcing the importance of maintaining prudent lending and risk control measures. The study concludes that effective management of non-performing loans and prudent provisioning policies are crucial to sustaining bank profitability and stability in Nigeria. It recommends that banks strengthen their loan recovery mechanisms, maintain adequate

Keywords

Credit Risk ManagementFinancial StabilityCommercial BanksARDL Bounds

References

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Dynamic Effects of Credit Risk Indicators on the Financial Stability of Commercial Banks in Nigeria: An ARDL Bounds Test Analysis

Abstract

Keywords

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