Impaired Loan in Commercial Banks, a Benediction or Atrocity? An Empirical Investigation on Selected Sub-Saharan African Countries

Abstract

This study investigates the effect of diversifying impaired and unimpaired loans on the financial performance of selected banks in SSA within the period from 2007 to 2016. Descriptive, correlation and panel regression techniques were adopted on 250 sampled banks form 30 countries. The results revealed that impaired loan ratio (ILR) has a direct and significant relationship with Return on Asset (ROA), while unimpaired loan ratio (LCR) has an inverse relationship with ROA, even though this relationship is insignificant. In addition, a restricted F-test was conducted and revealed that loan diversification has a cross-sectional uniqueness or heterogeneity effect on bank performance, while the Hausman test carried out showed that the fixed-effect model was the most efficient and consistent parameter estimate Thus, commercial banks need to revisit their loan structures both in terms and repayment modes to ensure that all loans they disburse are impaired, as this is positively and significantly related to the enhancement of their performance level. Also, banks should carry out their loan diversification practices in line with the adequate considerations of human capital training, development, and deployment, so as to ensure the attainment of the benefits of diversification on their performance.

Central Bank Policy and Commercial Banks Distress Level in Nigeria

“…This may explain why an increase in the percentage of impaired loans was associated with an increase in the profitability of banks in developed countries during the 1980s and 1990s. An increase in the impaired loan ratio also adversely affects the bank's financial position as the number of impairments will increase the cost of funds to the bank in the form of additional provisioning requirements and reduced earnings due to higher provision for bad loans (Olarewaju, 2019). The second difference of the Liquidity ratio (LIDR(-2)) was statistically significant at 1% and negatively related the Non-performing loan ratio (NPLR), this implies that as the liquidity ratio increases the value of Bank NPLR decreases.…”