Credit Risk and Financial Performance in Bank of Agriculture Limited, Nigeria: New Evidence from Nonlinear ARDL Approach

Abstract

Nonlinear association between credit risk (non-performing loans ratio) and financial Performance (return on asset) that is untested in the earlier studies may bring about incorrect inferences if indeed the association is nonlinear. This study uses the newly developed nonlinear autoregressive distributed lags (NARDL) framework to re-examine the link between credit risk and financial performance in Bank of Agriculture over the period 2010Q1–2020Q4. Adopting NARDL approach to capture non-performing loans ratio permits the simultaneous testing of short run and long run nonlinearities through positive and negative partial sum decompositions of non-performing loans ratio. The approach also quantify the short run and long run impacts of non-performing loans ratio increases and decreases on financial performance from asymmetric dynamic multipliers. The results show that non-performing loans ratio has short run and long run asymmetric effects on financial performance of the Bank. The empirical evidence shows that the results of the short run effects are materially different from those of the long run effects. While credit risk significantly hinders financial performance of the Bank in the short run, it considerably improves financial performance in the long run. The study recommend that, the shareholders of the Bank (Federal Ministry of Finance and Central Bank of Nigeria) should pay their outstanding share capital so as to improve the liquidity position of the Bank for better performance since the Bank had received only 33b out of it share capital of 50b in 34 tranches. In addition, the Bank should intensify effort in accessing funds from international development agencies in forms of grants or low interest long term facilities in order to dilute the non-performing loans ratio further.