Credit Risk and Financial Performance: A Study on Bank of Agriculture Limited, Nigeria

Abstract

The study examined the dynamic link between credit risk and financial performance of Bank of Agriculture (BOA) while controlling for economic growth and exchange rate from 2010Q1 to 2020Q4. The stationary analysis is performed by using Augmented Dickey Fuller (1981), Phillips-Perron (1988) unit root test and the Autoregressive Distributed Lag (ARDL) was used for testing the long run relationship among the variables. The results show that a long run relationship exists among the variables. The empirical findings indicated that non-performing loans ratio and exchange rate increase financial performance of Bank while economic growth reduce its financial performance over the study periods. The findings indicated that BOA has other source of income apart from interest on credit. Such sources includes but not limited to service charges, customers lien deposit, Federal Government intervention funds, collaboration funds, treasury operations as well as donations and grants from International Development Agencies. Thus, any injection from the above sources of income has the effect of diluting the non-performing loans. The study is on the opinion that Federal Government should channels all agricultural related funds to the Bank so as to increase its liquidity position (which have the effect of diluting the non-performing loans and increase financial performance). Moreover, this will enhance the Bank’s efficiency in financing agricultural value chain for national economic development.