Non-Performance Loan and Financial Stability

Abstract

The stability of commercial banks is essential to economic growth, yet rising non-performing loans (NPLs) continue to threaten the health of the banking sector. This study examined the effect of non-performing loans on the financial stability of thirteen quoted commercial banks in Nigeria over the period 2015–2024. Using an ex-post facto research design, data were collected from the banks' annual financial reports and analyzed with descriptive statistics and the Panel Autoregressive Distributed Lag (PARDL) model. The results indicate that the banking system is relatively resilient, with an adjustment speed of 68%, suggesting that nearly two-thirds of short-term financial imbalances are naturally corrected within one period. In the long run, both non-performing loans and bank size exerted significant negative effects on the Bankruptcy Index, while the liquidity ratio had a significant positive effect on financial stability. These findings highlight the importance of effective credit risk management, adequate liquidity, and prudent oversight in maintaining a stable banking system. The study recommends that regulatory authorities strengthen loan-loss provisioning requirements for non-performing loans, enforce minimum liquidity standards more rigorously, and apply enhanced regulatory oversight and higher capital requirements to systemically important financial institutions (SIFIs) to improve the long-term resilience of Nigeria's banking sector.