Economics and Business
Quarterly Reviews
ISSN 2775-9237 (Online)
Published: 25 December 2023
Impact of Credit Risk Pricing on Commercial Banks’ Loan Performance in Nigeria
James Joel Gunen, M. C. Duru, P. P. Njiforti
Ahmadu Bello University
Download Full-Text Pdf
10.31014/aior.1992.06.04.554
Pages: 292-299
Keywords: Credit, Credit Risk, Credit Risk Pricing, Loan Performance, Non-Performing Loans Rate, Interest Rate, Commercial Banks
Abstract
The impact of credit risk pricing on commercial banks’ loan performance was investigated to find out whether credit risk pricing of commercial banks can be used to achieve stability of loan performance in Nigeria. Variables like interest rate (maximum and prime lending rates), total loan and advances (TL/A), the ratio of loan and advances to total deposit (LA/TD), non-performing loan ratio (NPLR), risk premium (RP), gross domestic product (GDP), inflation rate (INFR) proxy by consumer price index, and exchange rate (EXR), were estimated using VAR model with lag one period as the optimum lag length. Generally, the result for cointegration shows the existence of a long-run relationship between the variables. The VECM was also estimated for short run analysis and the result shows that the past values of RP and FXR have positive and significant impact in explaining the current/future path of NPLR in the short run in Nigeria while the past value of MLR have negative and significant impact in explaining NPLR in the current period at 5% level of significance. However, the VAR model result for bank specific factors show that only the past period NPLR is positive and statistically significant in explaining the current/future path of commercial banks’ loan performance proxy by NPLR at the 10% level of significance. Whereas for macroeconomic factors, the result of the VAR model shows that the value of FXR is negative and that of NPLR is positive and statistically significant in the past periods in explaining the current/future path of NPLR in Nigeria at 5% and 10% level of significance respectively. This may perhaps imply that commercial banks in Nigeria at the time of lending to their clients play down on these variables in building up their price for credit (interest rate). This may be as a result of the existence of relationship banking and compliance failure by banks in performing their astute functions. Hence, the variables can be used to determine the impact of credit risk pricing on commercial banks’ loan performance in Nigeria. The paper recommends that the risk premium should not be made only to capture market expectations but also the volatility and asymmetry involved in their hidden activities of relationship banking which have taken a central stage in Nigeria’s banking business. The CBN should also develop a more robust and practical risk pricing model peculiar to the Nigerian environment aside the template existing.
References
Acebedo, L. and Durnall, J. (2013). Risk Based Pricing: When does it work and when does it not? An Adverse Selection Approach. An Experian White Paper, NG2 Business Park Nottingham. www.experian.co.uk
Bexley, J. B. and J. James (1999). Risk Management in Pricing a Financial Product. Retrieved from http://www.sbaer.uca.edu/re search/sribr/1999/07.pdf
Black, F., M. Jensen and M. Scholes, (1972), Capital Asset Pricing Model: Some Empirical Tests, in Michael Jensen, ed.: Studies in the Theory of Capital Markets (Praeger, New York).
Bonfim, D. (2009). Credit Risk Drivers: Evaluating the Contribution of Firm Level Information and of Macroeconomic Dynamics. Journal of Banking & Finance, 33, 281–299.
Brownbridge, M. (1998). The Causes of Financial Distress in Local Banks in Africa and Implications for Prudential Policy. A United Nations Conference on Trade and Development (UNCTAD) Discussion Paper No. 132 March, 1998. UNCTAD/OSG/DP/132
Curak, M., S. Pepur and K. Poposki (2013). Determinants of Non-Performing Loans – Evidence from Southeastern European Banking Systems. Banks and Banking Systems, Volume8, Issue 1
Demirguc-Kunt, A. and E. Detragiache (1998). The Determinants of Banking Crisis in Developing and Developed economies. IMF Staff Papers 45 (1)
Demirguc-Kunt, A. and H, Huizinga (1999). “Determinants of Commercial Banks Interest Margin and Profitability: Some International Evidence. World Bank Economic Review 13 (2) P. 379-408.
Diette, M. D. (2000). How Do Lenders Set Interest Rates on Loans? A Discussion of the Concepts Lenders Use to Determine Interest Rates. www. Minneapolisfed. Org/ research/ pub_ display.cfm?id=3030.
Kargi, H. S. (2011). Credit Risk and the Performance of Nigerian Banks. Dept. of Accounting, Ahmadu Bello University, Zaria, Nigeria.
Ofonyelu, C .C and R. S. Alimi (2013). Perceived Loan Risk and Ex Post Default Outcome: Are the Banks’ Loan Screening Criteria Efficient? Asian Economic and Financial Review, 2013, 3(8):9911002. http://www .investor words. com/955 /commercialbank.html #ixzz3 D7F6z4hX
Rewane, B. (2010). Nigerian Economic and Banking Industry Review and Outlook 2011.Paper Presentation to Management of Union Bank of Nigeria at Management Retreat, Held in December, 2010 at Eko Hotel, Victoria Island, Lagos.
Sanusi, A. R. (2010). Interest Rate Pass-Through and the Efficiency of Monetary Policy in Nigeria. A Paper Presentation at the 1st National Conference on State of the Nigerian Economy Held at M. A. Auditorium, BUK, Kano, Nigeria.
Duffie, D. and K. J. Singleton (2003). Credit Risk Pricing, Measurement, and Management. Princeton University Press. New Jersey.
Horvath, R. and P, Podpiera (2012). Heterogeneity in Bank Pricing Policies: The Czech Evidence. Published by Economic Systems Vol. 36, Issue No. 1 P. 87 – 108 information @treasury.govt.nz
Hou, Y. (2007). Non-performing Loans: Some Bank- Level Evidences. Research conference paper on Safety and Efficiency of the Financial System Organized with the support of the EU Asian Link Programme. cba.uupd.edu.ph/asialink/Hou_Dick inson.pdfo 20/2/2014.