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Keywords:

Credit Risk, Risk Management, Deposit Money Banks, Nigeria, Banking

JEL Classification:

G21. G32. 015

ABSTRACT

This study examines the impacts of credit risk management on the growth of Nigerian banks. Specifically, the study focused mainly on the impacts of credit risk management among Deposit Money Banks in Nigeria. The study employed an ex-post facto research design, utilizing secondary data from the financial information of 14 selected listed Deposit Money Banks from 2007 to 2022. The study population was defined as the total number of listed Deposit Money Banks, from which a sample of six banks was selected using a simple random sampling technique. The operationalization of variables included (1) the use of natural logarithm for bank size, (2) a three-level scale for credit risk, and (3) alternative measurements for collateral management and credit scores. Data analysis involved the calculation of descriptive statistics, correlation analysis, variance inflation factors, and regression analysis. The research hypotheses are also validated to assess the significance of various factors in credit risk management. The findings revealed that credit scores significantly enhance the effectiveness of credit risk assessment, and collateral management did not significantly contribute to mitigating credit risk. The findings also revealed that default risk management significantly reduces the credit risk of Deposit Money Banks in Nigeria. These results highlight the intricate nature of credit risk management in the banking sector and emphasize the need for a multifaceted approach.

Introduction

Credit risk is the potential loss that a lender or investor faces due to the borrower failure to meet its financial obligations, such as repaying a loan or making interest payments. It is a critical concern for banks, financial institutions, and businesses that extend credit. Credit risk is a significant threat banks face whilst providing financial services to customers (Fadun & Silwimba, 2023; Caruso et al., 2021). Several financial institutions have either collapsed or are facing near collapse due to poorly functioning subprime lending to firms and people with bad and unreliable credit (Fadun & Oye, 2021; Adeusi et al., 2014). The banking sector plays a crucial role in intermediating surplus units to deficit units for the development and growth of the economy (Fadun & Oye, 2020; Tassew & Hailu, 2017). It is an essential source of financing for...

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