Effect of Regulatory Requirements on Loan Loss Provision of Deposit Money Banks in Nigeria
Author(s)
Adeyemi Samson OGUNDIPE , Asikhia. O.U. , Kabouh, N.M. , Ajike, E. ,
Download Full PDF Pages: 25-35 | Views: 622 | Downloads: 156 | DOI: 10.5281/zenodo.3948209
Abstract
Banking plays a pivotal role in economic development due to its financial intermediation function and it holds the largest financial assets in the global economy. However, in recent years, an increase in NPLs provision diminishes income as banks are exceeding the legal 5% threshold for non-performing loans and are also hindering banks capacity to grant new loans for economic development. This study adopted ex post facto research design. Validated data was collected from the annual financial reports of 10 deposit money banks. The panel regression analysis tool was employed to analyse the data with descriptive statistics, Pearson correlation model, multiple linear regression tools and linearity test, heteroskedasticity, autocorrelation, co-integration and Hausman test were also carried out including analysing the data and results duly interpreted. The result show that regulatory requirements significantly effects loan loss provision (Adj.R2 = 0.345, F(9, 96) = 6.701, p < 0.05), with ρ-value of F-statistics of 0.00, which is significant as it is less than the chosen significant level of 5%. It was recommended that the management of banks’ use of discretion to provide a large sum for loan loss provision should be monitored and prevented to enhance the performance of banks in Nigeria.
Keywords
Regulatory requirements, loan loss provision, non-performing loans, bank performance.
References
i. Abata, M. A. (2015). Impact of Asset Management Corporation of Nigeria (AMCON) on the securitisation in the Nigerian banking sector. Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics, 1(2), 282-298.
ii. Akani, H.W. & Lucky, A.L. (2014). Money supply and aggregate stock prices in Nigeria: An analysis of cointegration and causality tests. Research Journal of Finance, 2(10), 1 – 24.
iii. Akani, H. W.& Onyema, J.I., (2017). Determinants of credit growth in Nigeria. A Multi-dimensional analysis. Journal of Economics and Sustainable development, 8(20) 202215.
iv. Anandarajan, A., Hasan, I., & Lozano-Vivas, A. (2003). The role of loan loss provisions in earnings management, capital management, and signaling. The Spanish experience. Advances in International Accounting, 16, 45e65
v. Anandarajan, A., Hasan, I. & McCarthy, C. (2007). Use of loan loss provisions for capital, earnings management, and signalling by Australian banks. Accounting & Finance, 47 No. 3, 357-379
vi. Ayeni, R.K., Kolapo, T.F. & Oke, M.O. (2012).Credit risk and commercial banks’ performances in Nigeria.A panel model approach. Australian journal of business and management research, 2, 31-38
vii. Badar, M. & Yasmin, A.(2013). Impact of macroeconomic forces on non-performing loans.An empirical study of commercial banks in Pakistan. Journal of Transactions on Business and Economics.1 (10).
viii. Beaver, W.H., Engel, E., (1996). Discretionary behavior with respect to allowances for loan losses and the behavior of security prices. J. Account. Econ. 22, 177–206
ix. Bikker, J. A. & Metzemakers, P. A. (2005).Bank provisioning behaviour and procyclicality,Journal of International Financial Markets, Institutions and Money,15 2, 141-157.
x. BIS (2017). Banking Regulation and Supervision after the Crisis –Where Are We Now, and what lies ahead? CIRSF Annual International Conference Lisbon, Portugal.
xi. Bouvatier, V., Lepetit, L., Strobel, F., (2014). Bank income smoothing, ownership concentration and regulatory environment. J. Bank. Finance 41, 253–270
xii. Bouvatier, V., & Lepetit, L. (2012).Effects of loan loss provisions on growth in bank lending. Some international comparisons. International Economics, 132.91-116.
xiii. Bouvatier, V., Lepetit, L., (2008). Banks procyclical behavior; does provisioning matter? Journal of International Financial Markets, Inst. Money 18, 513–526.
xiv. Central Bank of Nigeria (2014). Consolidated banking supervision annual report (2009 – 2014). www.central bank of Nigeria. Abuja.
xv. CBN, (201O). Annual report for the year ended 31 December, 2010. CBN Publications, Abuja.
xvi. Chodechai, S. (2004). Determinants of Bank Lending in Thailand. An Empirical Examination for the years 1992 – 1996, Unpublished Thesis.
xvii. Chude, N. P., & Chude D. I. (2014).The relationship between regulatory inconsistencies and Nigerian Banking Industry. Global Journal of Management and Business Research Finance 14 . 4 Version 1.0.
xviii. Djan, G. O., Stephen, F., Bawuah, J., Halidu, O. B. & Kuutol, P. K. (2015).Credit risk management and its impact on financial performance of listed banks in Ghana. International Journal of Financial Markets, 2(2), 24-32.
xix. European Central Bank (2017). Guidance to banks on non-performing loans. Quarterly published European Banking Authority (EBA) risk dashboard
xx. Glocker, C., & Towbin, P. (2012). Reserve Requirements for Price and Financial Stability: When Are They Effective? International Journal of Central Banking, 8 (1): 65-113.
xxi. Golin, J. & Delhaize, P. (2013). The Bank Credit Analysis Handbook: A guide for Analysts, Bankers and Investors. 2nd edition. John Wiley & Sons Singapore Pt. Ltd. Singapore. International Financial Report System (2018). IFRS 9.
xxii. Irungu, P.N., (2013). The Effect of Interest Rate Spread on Financial Performance of Commercial Banks in Kenya. An MSc Research Project Submitted to the University of Nairobi.
xxiii. Kargi, H. S. (2011). Credit risk and the performance of Nigerian banks (Master’s thesis). Ahmadu Bello University, Kaduna, Nigeria.
xxiv. Karl, E., Ray C. and Shannon, M. (2009). Principles of Economics. Pearson International Edition. Pretence Hall.
xxv. Kareem, A.O., Akinola, G.O. & Oke, E.A. (2014). Effect of mergers and acquisitions on employee development. The Nigerian banking industry experience. Fountain Journal of Management and Social Sciences. 3(2). 47-56.
xxvi. Karim, M. Z. K, Chan, S. & Hassan, S. (2010). Bank efficiency and non-performing loans.evidence from Malaysia and Singapore. Prague Economic Papers, 2, 118-132.
xxvii. Khan N.A. (2018). An Empirical Assessment of Non-Performing Assets in Indian Scheduled
xxviii. Kolapo, T.F. Ayeni, R.K & Oke, M.O. (2012).Credit risk and commercial banks’ performances in Nigeria. A panel model approach. Australian journal of business and management research, 2, 31-38
xxix. Lalong R.M.(2015). Credit risk management (CRM) practices in commercial banks of Bangladesh. A Study on Basic Bank Ltd. International Journal of Economics, Finance and Management Sciences.20150302.12. 2326-9553. 2326-9561 (Online)
xxx. Leventis, S., Dimitropoulos, P. E. & Anandarajan, A. (2011). Loan loss provisions, earnings and capital management under IFRS.The case of EU commercial banks, Journal of Financial Services Research, 40No. (1-2), 103-122.
xxxi. Makinde, H.O. (2016). Effect of Interest Rates on Commercial Bank Deposits in Nigeria (2000-2013).Proceeding of the First American Academic Research Conference on Global Business, Economics, Finance and Social Sciences (AAR16 New York Conference).
xxxii. Mishkin, F.(2000). The Economics of Money, Banking and Financial Markets. Addison-Wesley, Boston, sixth edition.
xxxiii. Mohammad H., Ali H., & Mahshid, S. (2015). Inspecting the effectiveness of liquidity risk on Banks profitability. Kuwait Chapter of Arabian Journal of Business and Management Review, 3 (9), 171-208
xxxiv. NDIC,(2010).Prudential guidelines for deposit money banks in Nigeria. www.ndic.org.ng
xxxv. Olokoyo, F. O. (2011). Determinants of commercial banks lending behaviour in Nigeria. International Journal of Financial Research, 2(2). 1<12
xxxvi. Okoye, P.V., Amahalu, N.N., Obi. & Nweze, C.L. (2016). Cash flow statement and liquidity. Empirical evidence from quoted Banks in Nigeria. Proceedings of Faculty of Management Sciences, International Conference, Nnamdi Azikiwe University, Nigeria, 705-718.
xxxvii. Ozili, P. K. (2018). Bank Loan Loss Provisions, Investor Protection and the Macro-economy. Munich Personal RePEc Archive (MPRA), University of Essex
xxxviii. Ozurumba, B. A. (2016). Impact of non-performing loans on the performance of selected deposit money banks in Nigeria. Research Journal of Finance and Accounting,5(2),32-41.
xxxix. Packer, F, and Zhu, H. (2012). Loan-Loss Provisioning Practices of Asian banks, Bank for International Settlements, Working Paper 375, April.
xl. Peydr´o, J. (2010). Discussion of the effects of bank capital on lending: What do we know, and what does it mean? International Journal of Central Banking, 6 (4): 55-69.
xli. Pool, S; De Haan,Li & Jacobs J.P., (2015). Loans loss provision, loans and credit and real economy. Journal of Macro-economics 45, 124-136.
xlii. Prochanow, H. V. (1944). Portfolio Management of Commercial Bank. (Objectives and Theory). Retrieved from www.yourarticlelibrary.com 15/05/2015.
xliii. Quittaniah, M.A.; Song L & WU, Q., (2013). Do Islamic banks employ less earnings management? Journal of International Financial & Accounting.24 (3) 203-233
xliv. Robitaille, P. (2011). Liquidity and Reserve Requirements in Brazil, International Finance Discussion Papers, Bank of Brazil 3-70.
xlv. Santos, A.C. (2000). Bank Capital Regulation in Contemporary Banking Theory. A review of the literature. BIS Working Papers. 90.3-44.
xlvi. Sayedi, S.(2013). Bank specific, industrial specific and macroeconomic Determinants of banks’ profitability in Nigeria. Journal of Finance.
xlvii. Soludo, C.C. (2004) Consolidating the Nigerian Banking Industry to meet the Development Challenges of the 21st Century. Address by the CBN Governor to the Bankers Committee. CBN, Abuja.
xlviii. Stiglitz, J. E. & Weiss, A. (1981). Credit rationing in markets with imperfect information. American Economic Review,71, 393-410.
xlix. Tetteh, L.F. (2012). Evaluation of credit risk management practices in Ghana commercial bank limited (Doctoral dissertation, Kwame Nkrumah University of Science and Technology) Retrieved from PDF.
l. Wezel, T; Chen Lau, J.A. & Colombia; F.,(2012). Dynamic Loan Loss Provisioning Effectiveness & Guide to implementation. IMF Working Papers. WP/12 /110.
li. World Bank (2014). World Development Indicators. World Bank, Washington DC.
lii. Wahlen, J., (1994). The nature of information in commercial bank loan loss disclosures Account. Rev. 69 (3), 455–478
Cite this Article: