The Link between Macroeconomic Variables & Non-Performing Loans in Deposit Money Banks in Nigeria (1981-2020)

Abstract

This study examined the effect of selected macroeconomic variables namely interest rate, exchange rate and inflation rate on Non-Performing Loans (NPLs)of Commercial banks in Nigeria for the period 1981 to 2020. Secondary data sourced from the Central bank of Nigeria statistical bulletin were used to estimate an Ordinary Least Squares (OLS) model. Results show that all the causal variables were jointly significant with an R² value of over 87%. Also, all the independent variables showed a positive relationship with the dependent variable.

However, while interest rate and exchange rate had a statistically significant relationship with the response variable, inflation rate did not show any statistically significant relationship.  Based on the findings, the study recommends that the monetary authorities should formulate and implement better policies for interest and exchange rate management in order to curtail increses in the level of NPLs in the banking sector and hence, save the critical banking sector from credit and attendant liquidity crisis.