Credit Risk Management and Working Capital of Deposit Money Banks in Nigeria

Abstract

This study examined the effect of credit risk management on the working capital position of deposit money banks (DMBs) in Nigeria. Using an ex-post facto correlational design, secondary panel data were obtained from the audited annual reports of 15 listed DMBs on the Nigerian Exchange over a ten-year period (2014–2023), yielding 150 bank-year observations. Credit risk was proxied by the non-performing loan ratio (NPLR), loan loss provision ratio (LLPR), and capital adequacy ratio (CAR), while working capital was measured using the net working capital ratio (NWCR). Data were analyzed using descriptive statistics, Pearson correlation, and panel fixed-effects regression, with bank size included as a control variable. Results showed that NPLR (β = -0.0091, p < .001) and LLPR (β = -0.0134, p = .001) had significant negative effects on NWCR, while CAR (β = 0.0052, p = .007) had a significant positive effect; the model explained approximately 41% of variance in working capital (adjusted R² = .41). Findings indicate that deteriorating loan quality and higher provisioning erode banks' short-term liquidity buffers, whereas stronger capital adequacy supports working capital sufficiency. The study recommends that DMBs strengthen credit appraisal and loan monitoring systems and that regulators sustain minimum capital adequacy enforcement to safeguard liquidity.