COVID-19 and non-performing loans of banks in Nigeria

What the paper says

Purpose This study aims to examine the impact of the COVID-19 pandemic on nonperforming loans (NPLs) in Nigerian banks, focusing on the period from 2010 to 2023. It also evaluates how bank-specific characteristics such as capitalization, liquidity, profitability and cost efficiency influence NPLs during economic downturns. Design/methodology/approach The study uses panel data analysis, using pooled ordinary least squares. It incorporates two-stage least squares (2SLS) and generalized method of moments (GMM) to address endogeneity, with subsample analyses for pre-COVID-19, during/post-COVID-19 and smaller versus larger banks. Findings The study reveals that the COVID-19 pandemic significantly increased NPLs in Nigerian banks, with smaller banks experiencing a more pronounced impact compared to larger ones. Key bank-specific characteristics such as capitalization, profitability and liquidity played crucial roles in mitigating NPL levels, with higher capitalization serving as a protective buffer against losses. The analysis also identified significant interaction effects, indicating that the relationship between these financial health indicators and NPLs was reshaped during the pandemic. Robustness tests confirmed that the adverse effects on NPLs were consistent across various measures of COVID-19 and different bank sizes, underscoring the need for strategic policy interventions to enhance financial stability in the banking sector. Practical implications The findings underscore the need for improved risk management strategies and capital buffers in banks, especially during periods of global economic disruption. Policymakers must enhance regulatory frameworks and ensure adequate liquidity provisions to maintain financial stability in future crises. Originality/value This study provides novel insights into the dynamics of NPLs in the Nigerian banking sector amidst the COVID-19 pandemic, a relatively underexplored area in the literature. By integrating robust panel data methodologies, including 2SLS and GMM, the research addresses critical endogeneity issues often present in financial studies. In addition, the examination of interaction effects between bank-specific characteristics and pandemic-related variables contributes to a deeper understanding of how these factors influence NPLs. This research not only enriches the existing literature but also offers practical implications for policymakers and banking practitioners seeking to enhance financial stability during economic crises.