Interest Rate and Non-Performing Loans of Deposit Money Banks Quoted in Nigeria
Author(s)
OGUNLEYE VICTORIA I. , Dr ADEGBIE F. , Ogbebor, Peter I ,
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Abstract
Increase in NPLs rate is the main reason of reduction in earnings of banks. The reason behind the bad debts was low repaying capacity of borrowers, which in turn was the result of uneconomic use of loans, low per capital, and high interest rate. Extra flexible credit rationing policy could also be the reason of high NPLs rate. Non-Performing loan rate was the most important issue for banks to survive. It was important to understand the phenomena and nature of non-performing loans; it has many implications, as fewer loan losses was indicator of comparatively more firm financial system, on the other hand high level of non-performing loans was an indicator of unsecure financial system and a worrying signal for bank management and regulatory authorities.
This study examined the effect of interest rate on non-performing loan of deposits money banks listed on the Nigeria stock exchange from 2010 to 2019. The methodology of the study make use of ex-post facto research design. Thirteen (13) deposit money banks was selected based while panel regression models estimation of pooled effect model, fixed effect model and random effect model was utilized on the basis of Hausman test.
The empirical findings from the first model shows that Bank’s Lending Rates has positive and significant effect on Non-performing Loan of the selected money deposit banks [ = 0.480; Pval = 0.045]. However, with the inclusion of liquidity and loan growth rate, the findings shows that Bank’s Lending Rates [ = 0.524; P_val = 0.034] becomes stronger though as it remains positive and statistically significant. In this same model, the coefficient of Loan Growth Rate (LGR) [ = - 0.048; P_val = 0.036] was seen to be negative and statistically significant Conversely, the relationship between Loan – to - Deposit Ratio (LDR) and Non-performing Loan (NPL) is not found to be statistically significant though; positive [ = 0.090; P-val = 0.103].
The study recommended that by hook or by crook, bank's management need to maintain a low level of NPLs by maintaining low Bank’s Lending Rates to avoid financial crisis to happen
Keywords
Interest rate: Banks’ Lending Rates: Non-Performing Loan
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