Empirical Examination of the Effect of Asset Quality on Financial Performance of Deposit Money Banks in Nigeria

Abstract

The performance of a banking institution is largely driven by its ability to increase its 
customers’ patronage, retain them and manage its assets and liabilities to enhance optimal 
returns. This can be done through banks maintaining adequate capital and quality assets for 
better performance. Even though banks are highly regulated and capital adequacy requirements 
have been in place since 1988 in Nigeria, many banks have experienced poor performance as 
indicated by high levels of credit risk, poor quality loans and high incidence of non-performing 
loans. It is thus imperative to ascertain the effect of asset quality on the financial performance 
of Deposit Money Banks (DMBs) in Nigeria.This study employed ordinary least square 
regression analysis with emphasis on fixed effect and random effect models. The findings of 
this research revealed that non-performing loans have a negative and not significant effect on 
the financial performance of DMBs in Nigeria (? = - 0.022478, P >0.05) and loan 
loss provisions have a negative significant effect on the financial performance of Deposit 
Money Banks in Nigeria (? = - 0.002954, P < 0.05). The results showed that asset quality is a 
key factor affecting the financial performance of Deposit money banks. It confirmed that 
Deposit Money Banks with good management of its loan achieve higher financial performance. 
So, to work properly in any economic condition the banks should have minimum or zero loan 
loss provision which provides financial soundness and stability