Credit Risk Governance and Financial Stability in Nigeria

Nigeria's banking sector occupies a central position in the country's economic architecture, yet it remains chronically exposed to credit risk, a vulnerability that has repeatedly threatened systemic stability. This study examines the relationship between credit risk governance and financial stability in Nigeria, using annual time series data spanning from 2000 to 2023. Four control variables are incorporated into the analysis: asset quality (ASTQ), GDP growth rate (GDP), regulatory requirement (RE), and credit growth rate (CGR). Financial stability is proxied by the non-performing loan ratio (NPL), the capital adequacy ratio (CAR), and the banking sector Z-score. Using an Ordinary Least Squares (OLS) regression framework with robust post-estimation diagnostics, including the Augmented Dickey-Fuller (ADF) unit root test, Breusch-Godfrey serial correlation test, Breusch-Pagan heteroskedasticity test, and the Variance Inflation Factor (VIF) test for multicollinearity, the findings reveal that asset quality and regulatory requirements exert statistically significant and positive effects on financial stability. At the same time, credit and GDP growth rates produce mixed, context-dependent outcomes. These results underscore the primacy of prudent credit governance frameworks in sustaining banking sector resilience. The study contributes to the thin but growing body of empirical literature on credit risk governance in frontier and emerging economies, offering actionable policy guidance for the Central Bank of Nigeria (CBN), banking sector regulators, and financial institutions navigating the post-pandemic macroeconomic landscape.