Credit Risk and Financial Performance: Evidence from Microfinance Banks in Nigeria
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Date
2020
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Publisher
International Organization of Scientific Research
Abstract
Microfinance banks hold the key to economic growth in developing economies and their financial health is crucial to achieving this role. One of the factors associated with the financial health of banks is credit risk. Therefore, this study examined the effect of credit risk on the financial performance of microfinance banks in Nigeria. Published financial reports of six purposively selected microfinance banks, covering the periods 2012 to 2018 were used as panel data for the regression model. The panel Ordinary Least Squares (OLS) technique was used to estimate the influence of the credit risk variables (proxy by non-performing loans and loan-loss provisions) on the financial performance (proxy by returns on assets) of the banks. The results of the analysis revealed that non-performing loan has a significant and negative effect on returns on assets (t-stat = -2.4768 and p = 0.02<0.05) while loan-loss provision has a negative but insignificant effect on returns on assets (t-stat = -1.3316 and p = 0.19>0.05). Further results also showed a significant and positive relationship between total loans and advances (introduced as control variable) and returns on assets (t-stat = 2.8171 and p = 0.01<0.05). The study therefore concluded that credit risk significantly predicted financial performance of microfinance banks in Nigeria. It was recommended that microfinance banks should develop credit policies that will enhance proper monitoring of their loan portfolios in order to reduce defaults. Furthermore, government should through their relevant agencies, ensure microfinance bank’s compliance with the provisions of the law on debt accumulation
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Keywords
Microfinance, Credit Risk