Credit Risk Regulation and Profitability of Commercial Banks in Nigeria
This study examined the effect of credit risk regulation on the profitability of commercial banks in Nigeria using quarterly industry-level data spanning 2009Q1 to 2024Q4. Specifically, the study investigated the influence of the Capital Adequacy Ratio (CAR), Non-Performing Loan Ratio (NPR), Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), and Monetary Policy Rate (MPR) on bank profitability, measured by Return on Assets (ROA). The study adopted an ex post facto research design and relied on secondary data obtained from the Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC), and related regulatory publications. The Autoregressive Distributed Lag (ARDL) modelling technique was employed to estimate the short-run and long-run relationships among the variables following confirmation of stationarity using the Augmented Dickey-Fuller (ADF) unit root test and cointegration through the ARDL bounds test. The results established a stable long-run relationship between credit risk regulation and commercial bank profitability. The findings further revealed that the Statutory Liquidity Ratio (SLR) and Monetary Policy Rate (MPR) exert significant negative effects on profitability, while the Cash Reserve Ratio (CRR) exhibited a negative effect that was significant at the 10 percent level. In contrast, the Capital Adequacy Ratio (CAR) and Non-Performing Loan Ratio (NPR) had negative but statistically insignificant effects on profitability. The error correction mechanism indicated that approximately 35.22 percent of short-run disequilibrium is corrected each quarter, confirming a stable adjustment towards long-run equilibrium. The study concludes that while credit risk regulation is essential for safeguarding banking sector stability, stringent liquidity and monetary policy measures may reduce banks’ profitability by constraining lending activities and increasing funding costs. The study recommends that the Central Bank of Nigeria adopt a balanced and risk-sensitive regulatory framework that promotes financial stability without unduly impairing the profitability and intermediation capacity of commercial banks.
Keywords: Credit Risk Regulation, Commercial Banks, Profitability, Return on Assets, Capital Adequacy Ratio, Cash Reserve Ratio, Statutory Liquidity Ratio, Monetary Policy Rate, Nigeria.
