INFLUENCE OF INTEREST RATE DYNAMICS ON CREDIT RISK AND DEPOSIT MONEY BANK PERFORMANCE IN NIGERIA
Abdulgaffar Muhammad , Sheikh Ahmed Abdullah , Ibrahim Mohammed and Ibrahim Bashir Bugaje
Volume 13 Issue 2
Abstract
This study examines the effect of credit risk on the financial performance of Deposit Money Banks (DMBs) in Nigeria, with particular emphasis on the moderating role of interest rate. Using a balanced panel dataset of eleven banks over the period 2013–2022, the study employs panel regression analysis, specifically the random effects model, to estimate the relationships among the variables. Financial performance is proxied by the price-earnings ratio (PE), while credit risk is measured using the ratio of non-performing loans (NPL), and interest rate is included as a moderating variable. The findings reveal that non-performing loans have a negative and statistically significant effect on financial performance, indicating that higher credit risk deteriorates bank performance. Interest rate also exhibits a negative and significant direct effect on performance, suggesting that rising interest rates may reduce profitability and increase default risk. However, the interaction between non-performing loans and interest rate is not statistically significant at the conventional 5% level, implying a weak moderating effect. The study concludes that credit risk is a key determinant of bank performance in Nigeria, while interest rate plays a limited moderating role. It recommends improved credit risk management practices and balanced monetary policy to enhance banking sector stability. Keywords: Credit Risk, Non-Performing Loans, Financial Performance, Interest Rate, Panel Data, Deposit Money Banks
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