NONPERFORMING
LOANS PORTFOLIO AND ITS EFFECT ON BANK PROFITABILITY IN NIGERIA
John N. N. Ugoani
College of Management and Social Sciences,
Rhema University, Nigeria
E-mail: drjohnugoani@yahoo.com
Submission: 18/11/2015
Accept: 30/11/2015
ABSTRACT
Huge
nonperforming loans portfolio erodes the ability of banks to make profits. In
the 1990s and beyond many Nigerian banks became weak and highly unprofitable
due to excessive nonperforming loans portfolio accumulated by bank promoters
and management that led to their demise. Insider dealing was the major cause of
large nonperforming loan portfolio in Nigeria, involving over-extension of
loans to promoters, directors and significant others that became bad and irrecoverable. To clean up the mess in the banking sector
and return the banks to the paths of sound management and profitability, the
CBN had to inject about N700bn in a bailout exercise while purging the system
of bad and irresponsible management teams .The exploratory research design was
adopted. Data generated were organized and coded before they were classified.
To achieve the objective of the study data analyses were done through
descriptive and regression analyses using the statistical package for the
social sciences for the regression. With the regression result of Y = 78.353 –
4.04x it was found that nonperforming loans portfolio has negative effect on
bank profitability.
Keywords: Shareholders funds; Self dealing; Nonperforming loans portfolio; Bank
profitability
1. INTRODUCTION
Nonperforming loans are those risk
assets not generating income. As a first step, loans are often considered to be
nonperforming when principal or interest on them is due and left unpaid for 90
days or more. Loan classification and provisioning entails much more than simply
looking at amounts overdue.
The borrowers’ cash-flow and overall
ability to repay amounts owing are significantly more important than whether
the loan is overdue or not. For financial reporting purposes, the principal
balance outstanding rather than delinquent payments is used to identify a
nonperforming loan portfolio.
The nonperforming loan portfolio is
an indication of the quality of the total portfolio and ultimately that of a
bank’s lending decisions. There can be a number of reasons to explain
deterioration in loan portfolio quality. It is unavoidable that banks make
mistakes in judgment. However, for most failed banks, the real problems are
systemic in nature and rooted in a bank’s credit culture and management style.
According to Greuning and Bratanovic
(2003) credit risk is the most common cause of nonperforming loans and bank
failures, causing virtually all regulatory authorities to prescribe minimum
standards for credit risk management. They opine that the basis of sound credit
risk management is the identification of the existing and potential risks
inherent in lending activities.
Measures to counteract these risks
normally comprise clearly defined policies that express the bank’s credit risk
management philosophy and the parameters within which credit risk is to
controlled. Specific credit risk management measures typically include three
kinds of policies. One set of policies includes those aimed to limit or reduce
credit risk, such as policies on concentration and large exposures, adequate
diversification, lending to connected parties or over-exposures.
The second set includes policies of
asset classification. These mandate periodic evaluation of the collectability
of the portfolio of loans and other credit instruments, including any accrued
and unpaid interest which exposes a bank to credit risk. The third set includes
policies of loss provisioning or the making of allowances at a level adequate
enough to absorb anticipated loss not only on the loan portfolio, but also on
all other assets that are subject to losses.
Profitability in the form of
retained earnings is typically one of the key sources of capital generation. A
sound banking system is built on profitable and adequately capitalized banks.
Profitability is a revealing indicator of a bank’s competitive position in
banking markets and of the quality of its management. It allows a bank to
maintain a certain risk profile and provides a cushion against short-term
problems.
Interest income is a major source of
bank profitability and is dependent on performing loans. Interest income
originates from loans and all advances extended by a bank such as working
capital overdrafts, among others. It also includes interest received on bank’s
deposits kept with other financial institutions. Interest income is often
eroded when a bank accumulates a large stock of nonperforming loans that do not
yield income.
There is a growing body of empirical
evidence to suggest that nonperforming loans (NPLs) have adverse effects on
bank profitability that often lead to bank failures. Profitability is an
indicator of a bank’s capacity to carry risks and / or to increase its capital.
The capital adequacy of a bank is generally gauged by the extent to which
owners’ funds provide cover for depositors in the event of loans and advances
becoming nonperforming.
It is often the practice to measure
capital adequacy by the extent to which the prescribed ratio is realized. Also,
it is common to examine the extent to which shareholders’ funds cover
nonperforming loans. For example, during the Nigerian banking crisis in the
1990s, while the total loans and advances in1990s was about N30bn, about N12bn,
representing about 44 percent of the total was nonperforming.
The level of deterioration in loan
quality contributed to low profitability and bank distress (NDIC, 1991). As the
distress syndrome became wide-spread, the distressed banks’ total nonperforming
loans and leases stood at N40.33 billion which represented about 55.69 percent
of the total nonperforming loans and leases of the banking industry in December
1996 compared to N35.20billion or about 60.82 percent of the industry total as
at the end of December 1995.
The distressed banks ratio of
nonperforming loans and leases to total loans and leases increased from 68.87
percent to about 79.77 percent while the industry ratio stood at about 33.90
percent in 1996. These represent empirical indicators of declining
profitability and potential bank failures (NDIC, 1996). Because the loans
portfolio usually represents the largest risk asset of a bank, bank regulation
always undertakes an appraisal of the lending culture of banks.
One of the principal objectives of
such appraisal is to verify the quality of the credit portfolio and make a
quantitative assessment on potential nonperforming loans or possible losses,
and recommending remedial actions so as to ensure that the banks remain
profitable. This is against the backdrop that profit is the bottom line
performance result showing the net effects of bank policies and activities in a
financial year, and nonperforming loans portfolio is not usually an indicator
of bank profitability (ADHIKARI, 2007; MATYSZAK, 2007; ALLI, 2011; BARLTROP;
MCNAUGHTON, 1997).
1.1
Statement of the Problem
Banks are susceptible to many risks
including credit risk that usually brings about nonperforming loans. Credit
crystallizes when loans and other advances become nonperforming and almost
irrecoverable.
During the financial crises of the
late 1980s, 1990s and beyond, many banks collapsed mainly due to huge
nonperforming, loans indicating that nonperforming loans portfolio is rather a
sign of pending bank failure than a pointer to bank profitability.
For example, in 1993 insolvent banks
accounted for about 20 percent of banking system assets and about 22 percent of
deposits. In 1995 almost half of the banks reported being in financial
distress, during which about 25 banks were liquidated as a result of
nonperforming loans portfolio.
Moving into 2000s technically
distressed banks in Nigeria had accumulated nonperforming loans in excess of
the shareholders’ funds that led to the injection of about N700bn by the
Central Bank of Nigeria and the formation of the Asset Management Company of
Nigeria (AMCON) to participate in a bazaar of nonperforming loans (NPLs) as
strategies to reviving the sick banks.
Qualitative data provide empirical
evidence to suggest that bank executives and top managers in some of the failed
banks in Nigeria were involved in insider illicit loan deals in excess of
N125bn. Empirical evidence from other Sub-Saharan African countries prove that
nonperforming loans portfolio was responsible for bank failures in many
countries.
For example, in 1988-90, in Benin,
all three commercial banks collapsed, 80 percent of banks loans portfolio were
nonperforming, and in Cameroon, nonperforming loans portfolio reached 60-70
percent in 1993 and five commercial banks were closed and three others were
restructured.
Also in 1998 in Cameroon,
nonperforming loans accounted for 30 percent of total loans. Three banks were
restructured and two were liquidated. In Sao Tome and Principle, 90 percent of
the nonbank’s loans were nonperforming in 1992, and nonperforming loans of the
largest bank in Mali reached 75 percent in 1989. (UGOANI, 2013A, 2013B; CAPRIO;
KLINGEBIEL, 2002).
The issues of nonperforming loans
portfolio and negative bank profit can be traced to insider abuse, compromise
of sound credit risk procedures, overtrading, incompetence, complacency,
inadequate supervision, among other shortcomings of corporate governance.
1.2
Objective of the study
The study was designed to explore
the effect of NPL portfolio on bank profitability.
1.3
Delimitation of study
The study was delimited to
commercial banks as financial intermediaries.
1.4
Limitations of the study
The study was constrained by lack of
research grant and dearth of current literature. However, these limitations did
not dilute the academic quality of the study.
1.5
Hypothesis
Based on the objective of the study,
two hypotheses were formulated and tested at 0.05 level of significance to
check the assumptions.
·
Ho:
Nonperforming loans portfolio has no
negative effect on bank profitability
·
Hi:
Nonperforming loans portfolio has
negative effect on bank profitability
2. LITERATURE REVIEW
Although banks are susceptible to
credit risk the high incidence of nonperforming loans portfolio is exacerbated
by poor risk appetite. According to Greuning and Bratanovic (2003), this
tendency typically involves the extension of loans which initially send
financial risk to a level beyond the reasonable payment capacity of the
borrower.
Poor selection of risks also
involves loans based on the expectation of successful completion of a business
transaction, rather than on the borrower’s credit worthiness, and loans made
for the speculative purchase of securities or goods like the case in Nigeria
where huge loans were dished out by most of the failed banks on questionable
and speculative basis, and most of which became nonperforming (NWAZE, 2006).
Self-dealing, and loans predicted on
collateral of problematic liquidation value or loans that lack adequate
security margins are sources of high nonperforming loans and bank profit. For
example, some former directors and chief executive officers of failed banks in
Nigeria are on trail for creating huge nonperforming loans. (JIBUEZE, 2011).
During the banking sector crisis in
Nigeria in the 1990s and 2000s, promoters and executives of some of the failed
banks were known to have been engaged in lending to themselves for the acquisition
of their bank shares contrary to the law. Such loans became nonperforming and
now subject to legal tussles. For example, shareholders of failed banks such as
Afribank, Oceanic, Intercontinental, etc, that had high NPLs portfolio sought
the help of the court on how to sale the sick banks. (JIBUEZE, 2014).
According to McNaughton & Dietz
(1997) the collapse of citibank’s credit culture led to asset deterioration in
one of the most well managed institutions in the world. According to them,
pressure to make high profits led to a tendency to overlook well-documented
credit standards during the 1980s.
By definition, loans to related
companies are not made objectively according to banks’ normal risk-acceptance
criteria. For that reason, and because a high percentage of bank failures have
been caused by insider lending, bank regulators tend to restrict and monitor
loans to related companies, so as to ensure good credit risk management.
According to McNaughton and Dietz
(1997), although banks initially emerged as deposit takers, they soon matured
into intermediators of funds, thereby assuming credit risk. Credit became “the
business of banking, and the primary basis on which a bank’s quality and
performance are judged.
According to them, the credit risk
management process deserves special emphasis, because proper credit risk
management quality influences the success or failure of financial institutions.
Studies of banking crises throughout the world show that the most frequent
factor in the failure of banks has been poor asset, usually loan, quality.
To this extent many bankers and
regulators believe that an understanding of a bank’s credit risk management
process provides a leading indicator of the quality of a bank’s loan portfolio.
The asset quality, in terms of performing and nonperforming categories,
directly reflects the quality of management and the ability of the bank to earn
profit. Minimizing nonperforming loans and increasing bank profitability
require good loan management because many good credits can become problem loans
because of inadequate monitoring or supervision.
Loan supervision requires monitoring
borrowers closely to detect signs that the borrower may have difficulty in
repaying the loan. Such warnings are necessary to maximize the effect of
corrective action and to minimize potential losses. In a study of many
countries Caprio and Klingebiel (2002) find that nonperforming loans portfolio
is the frequent determinant of bank failures.
They posit for example, in 1999,
Indonesia closed 61 banks and nationalized 54, of a total of 240. Nonperforming
loans for the banking system was estimated at about 65 – 75 percent of total
loans. Also many banks were liquidated in Japan in the 1990s due to
nonperforming loans portfolio put at $1trillion.
Caprio and Klingebiel assert that
due to nonperforming loans portfolio, between 1984 and 1991 more than 1400
savings and loan institutions and 1300 banks failed. In the heat of the
financial crises, the Central Bank of Nigeria (CBN) revoked 28 distressed and
unprofitable banks licenses in 1998. And in August 2009, the CBN woke up one
morning and dismissed the board and management of some banks that were
unprofitable, technically distressed, and found to be carrying nonperforming
loans in excess of N700billion (UGOANI, 2013a).
Prior to 2004 banking sector reforms
in Nigeria, total nonperforming loans in the Nigerian banking system rose from
N21.27bn in 2002 through N260.19bn in 2003 to N350.82bn in 2004. Nonperforming
loans as a percentage of total loans declined from N59.38bn in 2002 to N21.59bn
in 2003 and marginally rose to 23.08bn in 2004. Nonperforming loans as a
percentage of shareholders’, funds rose from 89.17bn in 2002 through N91.99bn
in 2003 to N107.82bn in 2004, indicating that shareholders’ interests in the
banking sector were wiped off by nonperforming loans (NNAMDI; NWAKANMA, 2011).
In view of the dangerous situation,
the CBN in 2009 injected a whopping sum of N620billion to cushion the effect of
nonperforming loans of about N1.0trillion fraudulently perpetrated by bank
executives (SANNI, 2010). Worried at the level of nonperforming loans
portfolio, the CBN set up the Asset Management Company of Nigeria, (AMCON) in
2010 to deal with the issue of toxic assets on permanent basis in accordance with
international best practices (ONOH, 2014).
The purchase of nonperforming loans
of banks by Asset Management Corporation of Nigeria (AMCON) and subsequent
injection of fresh capital into some of the banks led to improvement in asset
quality, liquidity, capitalization, and profitability of banks. Thus, the
shareholders’ funds of the banking industry increased by 696.18 percent from
N312.36 billion in 2010 to N2,486.95 billion in 2011.
The AMCON which commenced operation
in 2010, was very visible in the Nigerian financial system in 2011 as it
acquired three Deposit Money Banks (DMBs) that were established to take over
the assets and assume the liabilities, of the failing banks already carrying
huge nonperforming loans.
The three bridge banks acquired by
AMCON by purchase and assumption transaction were: Mainstreet Bank Limited,
Keystone Bank Limited and Enterprise Bank Limited (IBRAHIM, 2011).
According to Ibrahim (2012) due to
the activities of AMCON total shareholders’ funds in the banking industry rose
by N434.24bn from N1,934 trillion in 2011 to N2369 trillion in 2012. This was
attributable to the purchase of the nonperforming loans of the DMBs by AMCON
that allowed some of the banks to return to the path of profitability. In many
parts of the world nonperforming loans portfolio is known to have negative
effect on bank profitability.
According to Lata (2014)
nonperforming loans in Bangladesh has become a problem that has significant
negative impact on bank profitability. He posits that nonperforming loans is a
topic of great concern in Bangladesh. He states that for the last eight years,
loan default as a percentage of outstanding loans in state owned commercial
banks were 50 percent or above where private commercial banks and foreign
commercial banks hold maximum 5 – 10 percent of the total.
To this extent, Banks in Bangladesh
have been given ultimatum to bring down their soaring nonperforming loans to
below 10 percent of their respective outstanding loans. The causes of
nonperforming loans are usually attributed to the lack of effective monitoring
and supervision on the part of banks, lack of effective lenders’ recourse,
weaknesses of legal infrastructure, and lack of effective credit recovery
strategies (HANEEF; RIAZ, 2012).
Despite the activities of AMCON the
ratio of NPLs to total loans in Nigeria remains high at 5.82 percent as at
2011, and short of the global best practice of 3 percent. In view of the
worrisome situation, the CBN has ordered commercial banks to double provisions
on performing loans (PLs) to 2 percent from 1 percent, to build adequate
buffers against unexpected losses (Abioye, 2015).
To this extent, lending institutions
like the Bank of Industry (BOI) is paying greater attention to the recovery of
NPLs. The bank reports that it has hastened the pace of recovery of NPLs that
yielded N1.3billion as at December 31, 2014. According to Olaoluwa (2015) as at
December 31, 2013, the bank’s NPL ratio was 12.98 percent.
And by the end of 2014, the ratio
improved to 5.81 percent and by March, 2015 it further improved to 4.09
percent. The bank states that its target is to reduce the NPLs ratio to not
more than 3 percent, in “accordance with the global best practice”. The amount
of nonperforming loans recovered by the bank between January and March 2015 was
N403 million.
3. METHODOLOGY
3.1.
Research design
The exploratory research design was
adopted for the study. By this method, the researcher studied a sample of the
target population (Nachmias & Nachmais, 1976)
3.2.
Population
of the study
The target population comprised all
the 20 Deposit Money Banks (DMBs) in Nigeria.
3.3.
Sample
of the study
Among the 20 DMBs, 3 banks were
selected for the study through the judgmental method. The sample is adequate,
based on the 1/10th principle.
3.4.
Data
collection procedure
Information about nonperforming
loans, credit risk policy, credit recovery system as well as default rate are
usually confidential to commercial banks in Nigeria. Therefore data for the
study were obtained through Annual Reports and Statement of Accounts of the
Nigeria Deposit Insurance Corporation, Central Bank of Nigeria, Journals,
Newspapers, among other financial reports. To ensure consistency and accuracy,
data collected were organized and coded before they were classified.
3.5.
Data
analysis procedure
Data were analyzed through
descriptive and regression statistical methods using the statistical package
for the social sciences for the regression. The regression equation used was: Y
= a+bx
Where
Y – Bank Profitability
x – NPLs
a – a constant term
b – the regression slope
coefficient.
The
results were presented is tables.
4. PRESENTATION OF RESULTS
Table 1: Asset quality of some selected
insured banks as at 31st December, 1990 and 1991
Banks group |
Loans & advances (N Million) |
Classified loans & advances (N
million |
Proportion of classified loans and
advances to total loans & advances (%) |
|||
1990 |
1991 |
1990 |
1991 |
1990 |
19991 |
|
State government owned commercial
banks |
6,847 |
7,565 |
4,715 |
5,014 |
69.0 |
66.3 |
Non state government owned commercial
banks |
14.362 |
17,491 |
6.079 |
5,657 |
42.3 |
32.3 |
Merchant banks |
5,743 |
7,823 |
1,111 |
2,146 |
19.3 |
27.0 |
All banks |
26,952 |
32,879 |
11,905 |
12,817 |
44.1 |
39.0 |
Distressed banks |
6,405 |
5,380 |
4,660 |
4,113 |
72.8 |
76.5 |
Source: Nigeria Deposit
Insurance Corporation (1991) Annual Report & Statement of Accounts. Pp 21.
Table 2: Indicators of Insured Banks’
Assets Quality for the Last Quarters of 2002, 2003 and 2004.
Asset quality indicators (%) |
2002 |
2003 |
2004 |
Total non-performing credit (Nb) |
21.27 |
260.19 |
350.82 |
Ratio of nonperforming credits to total credits |
59.38 |
21.59 |
23.08 |
Ratio of nonperforming credits to shareholders’ funds |
89.17 |
91.99 |
107.82 |
Source: Nnamdi and
Nwakanma (2011).
Table 3: Asset Quality of Insured Banks
Item
|
Year
|
|
2010 |
2011 |
|
Total loans (N, billion) |
7,166.76 |
7,312.72 |
Non performing loans (N, billion) |
1,077.66 |
425.96 |
Ratio of Nonperforming loans total loans (%) |
15.04 |
5.82 |
Total of nonperforming loans to shareholders funds (%) |
250.85 |
17.13 |
Source: NDIC (2011) pp: 134
Table 4: Bridge Banks Purchased by AMCON
S/N |
Bridge banks |
Capital injected N. Million |
Bond face value N’million |
1 |
Mainstreet Bank Limited |
318.631 |
433.132 |
2 |
Keystone Bank Limited |
296.898 |
403.590 |
3 |
Enterprise Bank Limited |
121.417 |
165.049 |
|
Total |
736.946 |
1,001,771 |
Source: NDIC (2011) pp: 127.
Table 5: Model summary of regression
analysis
Model |
R |
R Square |
Adjusted R.Square |
Std. Erro of the Estimate |
1 |
-0.206a |
.043 |
-.014 |
21.48897 |
a) Predictors:
(Constant), NPLs Factor Score
b) Dependent Variable: Profitability
Table 6: Result of Anova of Regression
Analysis
Model |
Sum of square |
df |
Mean |
F |
Sig. |
2. Regression Residual Total |
349.041 7850.187 8199.227 |
1 17 18 |
349.041 461.776 |
.756 |
.397a |
a) Predictors:
(Constant), NPLs Factor Score
b) Dependent Variable: Profitability
Table 7: Regression Coefficients
Mode |
Unstandardized Coefficients |
Standardized Coefficients |
t |
Sig. |
|
B |
Std. Error |
Beta |
|||
2. (Constant) NPL Factor Score |
78.353 -4.404 |
4.930 5.065 |
-.206 |
15.893 -.869 |
.000 .297 |
c) Dependent Variable: Profitability
4.1.
Interpretation of regression result
In table 5, R2 = 0.043, this value
was not adequate at 5% level of significance.
In table 6, the regression was not
significant in other words, Nonperforming loans portfolio has negative effect
on bank profitability.
In table 7, the regression
coefficients calculated using the equation stated was shown as in table 8.
Table 8: Regression model
Y = 78.353 – 4.04x |
The slope coefficient, b, was not
significant at 5% level. So, we accepted Hi and concluded that NPL has negative
effect on bank profitability. This result supports the findings of Lata (2014)
that nonperforming loans are negatively related to banks’ profitability.
4.2.
Discussion
Research evidence regarding
identification, measurement, effect and cause of bank failure suggests that
NPLs rate is the most important issue that has negative effect on bank
profitability and inability to survive.
This is true because NPLs have
serious negative impact on loan growth rate; in which case, there will be a
negative effect on banks profitability as it reduces loan amount and interest
income of the banks simultaneously.
In the 1990s and up to 2011, banks
in Nigeria almost operated without a responsive corporate governance mechanism
which is frequently critical for the profitability and survival of any
corporate organization. A sound corporate governance structure is a vehicle for
formulating necessary policies for the proper management of a bank.
Bank directors are expected to
review policies, including credit risk policies, and responsibilities. That
enables the banks to operate in a safe and profitable manner. But it is
unfortunate to note that the accumulation of NPLs by many Nigerian banks and
poor loan recovery strategies and scams have been attributable to incompetent
board of directors.
Experience has also shown that no
matter the quality of regulation, it does not substitute for the role of an
active and efficient board of directors of a bank. To reduce NPLs, make profit
and survive, banks require a competent board to ensure the highest level of
confidence of the members of the public.
An important way of ensuring the
profitability and survival of banks is for their board to show the highest
sense of discipline, integrity, stead fastness and tenacity of purpose. Over the
years, the regulatory and supervisory agencies in Nigeria had continually
raised issues bordering on corporate governance breaches in some of the banks
that could impair their viability and stability.
But rather than work on improvement,
some of them worked hard to undermine laid down rules and regulations, which
invariably led to the creation of huge NPLs that had negative effect on their
profitability. Huge nonperforming loans portfolio erodes the ability of banks
to make profit.
In the 1990s and beyond many
Nigerian banks were weak and unprofitable due to nonperforming loans that led
to their demise. A major challenge of the banking sector in Nigeria is poor
credit risk management. There are instances where bank promoters and executives
collude with both insiders and outsiders alike to create risk assets without
complying with laid down lending principles.
Such risk assets often become
nonperforming and irrecoverable leading to huge losses. For example, the ratio
of nonperforming loans to shareholders’ funds deteriorated from 89 percent in
2002 to 108 percent in 2004. This suggests that most banks were reporting huge
losses and that stakeholders funds had been completely erased by nonperforming
loans portfolio.
The banks had no profits to support
their capital funds which were so low and unable to absorb losses arising from
nonperforming risk assets. Despite the injection of cash by the CBN to revive
badly managed banks, sound regulatory measures to arrest the incidence of inept
corporate governance that contributes to poor credit appraisal and
nonperforming loans portfolio did not help matters. This result support
empirical evidence to confirm that nonperforming loans portfolio has negative
effect on bank profitability.
4.3.
Recommendations
·
Insider
dealing should be outlawed in banks in Nigeria. This was a major source of huge
nonperforming loans portfolio in 1990s. Over extension of loans to promoters,
directors and other large shareholders is often done at the detriment of
depositors because such funds often become irrecoverable.
·
Banks
must endeavour to comply with both internal and external lending procedures.
Most failed banks were victims of compromising of lending principles because
loans that were granted with full knowledge of the violation of sound banking
and credit risk principles are hardly repaid.
·
In
attempts to outperform others in the market place most failed banks were over
ambitious over profitability and growth. A situation where appetite over
earnings outweighs the soundness of lending decisions leads to bad lending and
multiplication of nonperforming loans.
·
Loans
ought to be made on the basis of sound collateral. Even though not a condition
for sound lending, it could serve as a soft cushion for the recovery of
nonperforming loans.
·
Regular
regulatory supervision is imperative for sound banking. This will expose lapses
of technical incompetence on the part of management and enforce disclosure of
vital information needed for the evaluation of the state of the bank.
4.4.
Scope
for further study
Further study should examine the
effect of poor corporate governance on bank stability. This is necessary as an
attempt to finding a solution to the problems of bank failures in Nigeria.
5. 5. CONCLUSION
Although there may be other causes
of bank losses and failures, the bank failure phenomenon in Nigeria in the
1990s, and beyond was caused mainly by huge nonperforming loans portfolio
created by bank promoters and management which had negative effect on the
profitability of the banks.
To clean up the banking system and
return banks to the paths of sound management and profitability the CBN had to
replace some bad management teams with Interim Management Boards (IMBs) among
other regulatory actions. With the regression result of Y = 78.353-4.04x it was
found that nonperforming loans portfolio has negative effect on bank
profitability. This result supports Lata (2014) that nonperforming loans
portfolio does not explain bank profitability. This is the crux of the study.
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