Credit Risk Management and Capital Adequacy of Deposit Money Banks Listed in Nigeria

Abstract

Capital adequacy is central to the effective functioning of financial institutions. The vulnerability of deposit money banks in Nigeria has increased due to rising risk assets and capital deficits. These challenges constrain the banks' competitiveness in the global market. Studies have suggested that optimizing credit risk management is crucial for mitigating capital adequacy challenges in Nigeria. This study examined the effect of credit risk management on the capital adequacy of deposit money banks listed in Nigeria. Data were extracted from audited annual reports and accounts for a period of 11-year period (2012 to 2022). Data reliability was premised on the certification of statutory audit. The study population comprised 14 deposit money banks listed on the Nigerian Exchange Limited as of December 31, 2022. The study employed inferential statistics, using panel data fixed-effects regression with Driscoll-Kraay standard errors. The findings revealed that credit risk management had a significant joint effect on the capital adequacy ratio. Based on these findings, the study recommended that bank managers prioritize credit risk management. Additionally, financial regulators and policy makers should strengthen the enforcement of credit risk policies to reduce the prevalence of non-performing loans among deposit money banks in Nigeria.