Credit Risk Management and Bank Performance Indicators: Consideration for Financial Education
Abstract
This study synthesizes the nexus between credit risk management and bank performance indicators in Nigeria, specifically determining the effects of capital adequacy , loan-loss provisioning and loan-to-total-assets ratio on return on assets , using annual data between 2000 and 2024 from the Central Bank of Nigeria and the Nigeria Deposit Insurance Corporation. An Autoregressive Distributed Lag framework was applied to capture both short-run dynamics and long-run relationships. Bounds testing indicates a dynamic long-run relationship among the variables, but short-run effects dominate the system. Key findings include: insignificant short and long run effects of CAR on ROA, a positive association between provisioning and ROA (with negative lagged effect LLP), and significant short-run adverse effects of rapid lending growth on performance. The error-correction term showed rapid adjustment toward equilibrium following shocks. The evidence suggests that operational levers: timely, forward-looking provisioning, disciplined credit expansion and strengthened origination and monitoring, are the most effective tools for containing credit risk and enhancing bank performance. Policy recommendations include strategic education on the adoption of expected-loss provisioning, countercyclical oversight of loan growth, enhanced early-warning systems and financial education on credit risk and performance management of banks.
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