FINANCIAL RISK MANAGEMENT AND PERFORMANCE OF LISTED DEPOSIT MONEY BANKS IN NIGERIA
DOI:
https://doi.org/10.5281/zenodo.20094778Keywords:
Financial risk management, Credit risk, Operational risk, Market risk, Bank profitability, Nigeria, Panel data, Basel IIIAbstract
This study investigates the impact of financial risks, specifically credit risk, operational risk, and market risk on the profitability of listed Deposit Money Banks (DMBs) in Nigeria over the period 2014–2023. Using fixed-effects panel regression on data from 10 listed DMBs, the study examines the effects of three risk-weighted ratios: credit risk, operation risk and market risk (CRTWR, ORTWR, MRTWR) and a risk-adjusted spread ratio (RISASR) on Earnings Per Share (EPS), Return on Assets (ROA), and Return on Equity (ROE), while controlling for bank size (BSIZE). Results reveal that credit risk (CRTWR) exerts a significant positive effect on all profitability metrics, suggesting that Basel III-compliant capital allocation enhances financial performance. Operational risk (ORTWR) consistently reduces profitability across all measures, reflecting the adverse impact of fraud and IT failures in Nigeria's digitally evolving banking sector. Market risk (MRTWR) shows only marginal significance for EPS, with no significant effect on ROA or ROE, indicative of effective hedging practices. RISASR is insignificant across all models. Bank size (BSIZE) positively moderates profitability, confirming economies of scale advantages. The findings have important implications for bank managers, regulators, and the Central Bank of Nigeria (CBN) in designing risk-sensitive capital and operational frameworks.
Downloads
References
Adebayo, O., Adeyanju, D., & Olabode, O. (2011). Impact of Cash Reserve Ratio on bank profitability in Nigeria. Journal of Banking and Finance, 12(3), 45–60.
Adegbie, F., & Adebanjo, S. F. (2020). Credit risk and financial performance of deposit money banks in Nigeria. European Journal of Accounting, Auditing and Finance Research, 8(8), 1–20.
Adesina, J. (2018). Optimal loan-to-deposit ratio for Nigerian banks: A stochastic frontier analysis. African Journal of Economic Studies, 7(1), 34–50.
Adeusi, S. O., Akeke, N. I., Adebisi, O. S., & Oladunjoye, O. (2014). Risk management and financial performance of banks in Nigeria. IOSR Journal of Business and Management, 14(6), 52–56.
Ajayi, S. O., & Oseyomon, E. P. (2019). Financial risk and financial performance of deposit money banks in Nigeria. Journal of Economics and International Finance, 11(5), 113–124.
Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120.
Basel Committee on Banking Supervision. (2006). International convergence of capital measurement and capital standards: A revised framework. Bank for International Settlements.
Basel Committee on Banking Supervision. (2010). Basel III: A global regulatory framework for more resilient banks and banking systems. Bank for International Settlements.
Basel Committee on Banking Supervision. (2016). Minimum capital requirements for market risk. Bank for International Settlements.
Basel Committee on Banking Supervision. (2017). Basel III: Finalising post-crisis reforms. Bank for International Settlements.
Bhatt, T. K., Ahmed, N., Iqbal, M. B., & Ullah, M. (2023). Examining the determinants of credit risk management and their relationship with the performance of commercial banks. Journal of Risk and Financial Management, 16(4), 1–23.
Central Bank of Nigeria. (2019). Implementation of Basel III liquidity coverage ratio in Nigeria: 2017–2019. CBN Bulletin.
Chernobai, A., Ozdagli, A., & Wang, J. (2020). Operational risk management in financial institutions: A review. Journal of Financial Services Research, 57(1), 1–25.
Dugguh, S. (2015). Risk management strategies in financial institutions in Nigeria: The experience of commercial banks. Journal of Management Sciences, 7(1), 147–157.
Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383–417.
Freeman, R. E. (1984). Strategic management: A stakeholder approach. Pitman.
Friedman, M. (1970). The social responsibility of business is to increase its profits. The New York Times Magazine, 13, 32–33.
Hassan, I. M., Ewuga, S. K., Abdul, S. M., Abrahams, T. O., Oladeinde, M., & Dawodu, P. (2024). Cybersecurity in banking: A global perspective with a focus on Nigerian practices. Computer Science & IT Research Journal, 5(1), 41–59.
Hull, J. (2018). Risk management and financial institutions (5th ed.). Wiley.
Inegbedion, H., Vincent, B. D., & Obadiaru, E. (2020). Risk management and the financial performance of banks in Nigeria. International Journal of Financial Research, 11(5), 115–128.
Merton, R. C. (1974). On the pricing of corporate debt: The risk structure of interest rates. The Journal of Finance, 29(2), 449–470.
Nwakanma, P., & Ibe, G. (2014). Bank size and credit risk-profitability dynamics in Nigerian banks. Journal of Financial Research, 8(3), 112–128.
Nyahas, S. I., & Ekoja, B. E. (2024). Basel III liquidity requirements and bank profitability: Evidence from Nigeria. International Journal of Business Economics and Management Science, 6(7), 1–18.
Ogunwale, O., & Isibor, A. A. (2024). Impact of credit risk management on the performance of Nigerian deposit money banks: An analysis from 2010 to 2020. Asian Journal of Advanced Research and Reports, 18(10), 1–14. https://doi.org/10.9734/ajarr/2024/v18i10752
Oladele, P. O., & Akinwumi, A. (2024). Risk management practices and financial performance: Analysing credit and liquidity risk management and disclosures by Nigerian banks. Journal of Risk and Financial Management, 17(3), 1–20.
Olalekan, A., & Adeyemi, B. (2013). Credit risk and bank performance: Evidence from Nigerian banks. Journal of Banking and Finance Studies, 6(2), 56–72.
Olayemi, S. (2016). Liquidity risk and return on assets in Nigerian banks: A time-series analysis. Journal of Financial Risk Management, 9(4), 67–82.
Oluwaleye, T. O., Adetunji, O. M., & Ajibolade, S. O. (2023). Risk management and profitability of quoted banks in Nigeria. European Journal of Economic and Financial Research, 7(3), 1–20.
Onaolapo, A. (2014). Capital adequacy ratio and credit risk mitigation in Nigerian banks. African Journal of Accounting and Finance, 7(3), 45–60.
Onuora, J., Okonkwo, V., & Udeh, S. (2020). Determinants of credit risk on return on equity in Nigerian banks. Journal of Banking and Performance, 11(2), 34–50.
Osagiende, M. (2023). Risk management and performance of the Nigerian banking industry. Journal of Business Studies and Management Review, 6(2), 1–10.
Ozigbo, A. S., & Sylvester, E. (2022). Credit risk management and financial performance of deposit money banks in Nigeria. International Journal of Banking and Finance, 9(2), 45–60.
Resti, A., & Sironi, A. (2019). Risk management and regulation in banking. Palgrave Macmillan.
Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of corporate finance (12th ed.). McGraw-Hill Education.
Schinasi, G. J. (2004). Defining financial stability. IMF Working Paper WP/04/187. International Monetary Fund.
Ugah, J. (2020). Financial risks management and bank profitability in Nigeria: Case of Access Bank of Nigeria Plc. International Journal of Research and Innovation in Social Science, 4(9), 1–8.
von Bertalanffy, L. (1968). General system theory: Foundations, development, applications. George Braziller.
