Credit Risk Management and Capital Adequacy in Nigerian Commercial Banks

This study examined the impact of credit risk management practices on capital adequacy in Nigerian commercial banks. The objective of the study was to investigate the effect of loan loss provisions, loan loss reserves, and collateralization on capital adequacy. An ex-post facto research design was adopted, and data was collected from the annual reports of Nigerian commercial banks from 2008 to 2023. The study employed descriptive statistics, unit root tests, and Autoregressive Distributed Lag (ARDL) regression analysis to analyze the data. The results revealed that loan loss provisions, loan loss reserves, and collateralization had no significant impact on capital adequacy in Nigerian commercial banks. However, the ARDL Bound test confirmed a long-run relationship between the variables. These findings imply that banks' capital adequacy is influenced by a range of factors beyond credit risk management practices, including macroeconomic conditions, regulatory requirements, and bank-specific characteristics. Therefore, while credit risk management remains important, it should be complemented by broader considerations for maintaining capital adequacy. The study concluded that credit risk management practices may not be effective in influencing capital adequacy in the short run, but their long-run relationship is important for banking stability. Based on the findings, the study recommends that banks optimize their provisioning strategies, maintain adequate reserve levels, prioritize creditworthiness and repayment capacity, and closely monitor macroeconomic conditions to adjust their risk management strategies. The study's findings contribute to the ongoing debate on the impact of credit risk management practices on capital adequacy in commercial banks.