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Non-performing loans (NPLs) generally refer to loans which for a relatively long period of time do not generate income. This implies that the principal and or interest on these loans have been left unpaid for at least 90 days (Caprio and Klin-gebiel, 1999).

It has become a critical issue of discourse in finance literature because of the close link between banking crises and massive accumulation of NPLs. 

Indeed, some studies have found that non-performing loans are one of the main reasons that cause insolvency of the financial institutions and ultimately hurt the whole economy (Hou 2007, Kane and Rice 2001). 

The costs of huge NPLs have been documented in the literature. Huge NPLs may negatively affect the level of private investment, increase deposit liabilities and constrain the scope of bank credit to the private sector. In the same way, accumulation of NPLs can negatively affect private consumption which may lead to economic contraction. 

Also, huge NPLs may exacerbate the already high pressure on government revenues as attempt to resolve it may force government to provide financial assistance to problem banks [Conzalez-Hermosillo et al, 1997]. 

Essentially, if the issue of non-performing loans is left unresolved, it can compound into financial crisis, where the loans exceed bank capital in a relatively large number of banks.Given the economic, fiscal and financial costs of non-performing loans, it is therefore imperative to control it. 

However, in order to control non-performing loans, it is necessary to understand its roots causes. It is in the light of this that the paper examines the determinants of non-performing loans in Nigeria. As far as the banking system of Nigeria is concerned, it has faced a lot of problems. 

One of the most destructive problems faced by the Nigerian financial sector is the huge amount of NPLs which not only harm efficiency and growth of the banking sector but also endanger growth and development of the Nigerian economy. 

The magnitude of nonperforming loans in Nigeria increased from N273 million in 1981 to N4,771 million in 1987. The total nonperforming loans increased to N111,587 million in 2000 and further to N1,112,423 million in 2011. 

The phenomenal increase in non-performing loans in Nigeria over the years therefore makes it imperative to ascertain the causes of these loans in order to reduce it. The remainder of the paper is organized as follows:

the next section provides the review of empirical literature. Section 3 discusses the methodology, section 4 presents the estimation results of the econometric model. The last section provides the conclusion.


In this section, we provide a summary of the results of existing studies on the determinants of nonperforming loans. Keeton and Morris (1987) examined the factors that cause non-performing loans in the banking sector in America over the period 1979-1985. 

The results showed that bad performance of the agriculture and energy sectors coupled with poor economic settings/conditions were the main factors responsible for non-performing loans during the study period. 

The study by Sinkey and Greenwalt (1990) for the same country over the period 1984-1987, found high interest rate, unnecessary loans along with unpredictable funds as the main factors that increase non-performing loans in the banking sector of America. 

In the same vein, the study by Gambena (2000) for America over the period 1987-1999 showed that income and unemployment rates were the main factors that caused loan losses in America. Salas and Sanrina (2006) examined the determinants of NPLs for Spain over the period 1984-2003. 

The results of the estimation showed that high interest, GDP growth and soft credit conditions were the main factors determining NPLs in Spain. The study by Hoggarth, Forensen and Zuchina (2008) for United Kingdom over the period 1988-2004 found inflation and interest rates as the main determinants of non-performing loans in UK. 

The study by Rajan and Dhal (2003) for Indian banks showed GDP growth, bank size, credit orientation and credit terms were the main determinants of NPLs in India. The study by Erjavec, Cota and Jaksic (2012) for Croatia over the period 2000-2010 using a vector-autoregressive (VAR), showed a strong sensitivity of the Croatian banking sector to contractionary monetary policy shocks and to negative demand shocks. 

The study by Fainstein and Novikov (2011) for the Baltic countries examined the determinants of NPLs over the period 1997-2009. The results based on vector error correction model (VECM) found real GDP growth as the main determinant of NPLs in all the countries studied. 

The results showed that real estate market growth played an important role only in Latvia and Lithuania. Vogiazes and Nikolaidu (2011) examined the determinants of NPLs in the Romanian banking sector over the period 2001-2010. 

The results showed that construction and investment expenditure, unemployment, inflation rate and Romania’s external debt to GDP as well as money supply broadly defined were the main determinants of NPLs in Romania. 

The results of Vogiazes and Nikolaidou (2011) discussed above is very much in line with Bofondi and Ropele (2011) for Italy. Bofondi and Ropele found that non-performing loans were positively associated with the unemployment rates, and lending rates but negatively related with the growth of GDP for Italy over the period 1990-2010. 

The study by Nkusu (2011) for twenty-six (26) advanced economies over the period 1998-2009 investigated the determinants of NPL ratio and of the first difference of the NPL ratio. 

The results showed that adverse macroeconomic development in particular a contraction of real GDP, a high unemployment rate, high interest rates, a fall in house prices and a fall in equity prices negatively affected NPLs. 

In the same way, study by De Bock and Demyanets (2012) for 25 developing economies over the period 1996-2010 revealed that real GDP contraction, currency depreciation against the US dollar, weaker terms of trade and outflows of debt – creating capital precipitated higher aggregate NPL ratio of the banking sector. 

The study by Beck, Jakubik and Piloui (2013) for 75 advanced and emerging economies for the period 2000 to 2010 investigated the determinants of NPLs in these countries. 

The results of the estimation showed that real GDP growth, share prices, nominal effective exchange rate of the local currency and bank lending rate had significant effect on NPL ratio. 

The study revealed that direction of the impact of exchange rates is a function of the extent of foreign exchange lending to unhedged borrowers. Additionally, the results showed that the impact of the share prices was larger in countries that had a large stock market relative to GDP.

The study by Louzis, Vouldis and Metaxas (2011) for Greek banking sector over the 2003 and 2009 found real GDP growth, unemployment lending rates, public debt and management quality as the main determinants of non-performing loans in Greece. 

Finally, the Khemraj and Pasha (2009) explored the determinants of NPL in Guyana over the period 1994-2004. The results showed that growth of GDP had an inverse relationship with NPLs while real effective exchange rate and higher lending rate had direct relationship with NPLs.

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