Examining the internal factors determining the disparity in loan performance across the commercial banks in Nigeria

Abstract

The Nigerian banking industry experienced severe loan problems and unprecedented losses in the 1990s. The severity of the loan problems varied across banks due largely to differences in the bank’s financial strategies (or specific-attributes). This paper examines the empirical relationship between these strategies and problem loans at these banks. A simple model is specified and estimated, using a pooled cross-sectional data. The empirical evidence strongly suggests that differences in management quality and level of credit risk are the key determinants of problem loans and loan losses at the Nigerian commercial banks in the mid-1990s. However, there is also an evidence of indirect role of credit policy, which appears to suggest that collateralisation of loans is not a sufficient guarantee for loan repayment. Undoubtedly, stringent credit requirements may to problems of adverse selection and loan delinquencies.