EXTERNAL ENVIRONMENTAL FACTORS AND NON-PERFORMING LOANS IN NIGERIAN BANKING INDUSTRY

Abstract

Over the years the banking sector in Nigeria has witnessed a number of crises has been traced to the high figures of non-performing loans (NPLs) among other factors. Therefore, this study investigated the external determinants of nonperforming loans in the Nigerian banking industry. A time series research design approach of autoregressive distributed lag model (ARDL) was applied. The estimated model revealed that the coefficient of macroeconomic factors: growth in GDP (118%), Inflation Rate (-54.1%), Exchange Rate (3.37%), Balance of Trade (0.015%), and Global Financial Crisis (240%,68.3%) were significantly associated with NPLs. On the other hand, coefficient of social-political factors; Energy Crisis (2%, 0.96%), Defense and Security Vote (1.14%) and Political Instability (176%) were also significantly associated with NPLs in the Nigerian banking industry. The study further revealed that the 2005 banking reform policy of Central Bank of Nigeria (CBN) was effective at reducing NPL of banks. The study therefore, recommends among others that banks should pay attention to the performance of the real economy when extending loans to their customers, especially during economic boom, given the reality that loan delinquencies are likely to be higher during periods of economic downturn.