TITLE:
Impact of Credit Default on the Capital Adequacy Ratio of Quoted Deposit Money Banks in Nigeria
AUTHORS:
Agbana John, Umar Abbas Ibrahim, Ephraim Adamu Tonga, Arinze-Emefo Ifeyinwa Chinyere
KEYWORDS:
Credit Defaults, Capital Adequacy Ratio, Tier 1 Ratings, Quoted Deposit Money Banks, Nigeria
JOURNAL NAME:
Open Access Library Journal,
Vol.12 No.3,
March
25,
2025
ABSTRACT: The need for the proper and efficient management of credit default and capital adequacy ratio of the quoted deposit money banks (QDMBs) in Nigeria is urgent. It continues to constitute challenges detrimental to the Nigerian banks’ progress and, by extension, the country’s economy at large. This study, thus, investigates the impact of credit default on the credit adequacy ratio of QDMBs in Nigeria. Thirteen (13) deposit money institutions listed on the Nigerian stock exchange were utilised to accomplish the purpose, and panel data was obtained between 2011 and 2023. This study adopts Modern Portfolio Theory (MPT) as the theoretical framework. Developed by Harry Markowitz in the 1950s, MPT is the foundation for creating investments that maximise return while minimising risk. The basis for this is that investors are rational and risk-averse and can create different investments to optimise the risk-return of the business. According to this theory, banks acquire assets from assets to manage credit risk. The study used panel regression analysis to establish the relationship between dependent and independent variables. The panel regression results confirm that both credits spread, and non-performing loans substantially and favourably affect banks’ tier 1 capital ratios. Furthermore, the loan loss provision and regulatory capital have a negligible effect on banks’ tier 1 capital ratios during the specified period. This study concluded that banks’ tier 1 capital ratios are increasingly affected by the influence of non-performing loans and credit spread, which forms their credit default on their capital adequacy ratio. This study recommended that the management of Nigeria’s publicly traded Deposit Money Banks should strive to minimise losses from bad debts arising from non-performing loans and other relevant credit charges while maintaining a satisfactory level of overall and easily convertible assets, as immediate action is necessary to prevent further deterioration of the banking sector.