Board Characteristics, Non-Performing Loans and Financial Performance of Deposit Money Banks in Nigeria

Abstract

This study examined the relationship between board characteristics, non-performing loans (NPLs), and financial performance of deposit money banks in Nigeria, with special focus on the mediating role of NPLs. The broad objective was to investigate how board governance attributes influenced bank profitability through the credit risk channel. Specifically, the study examined the effect of board characteristics on financial performance, assessed the impact of NPLs on financial performance, and evaluated the joint effect of board characteristics and NPLs on financial performance. The study was anchored on agency theory and resource dependency theory. A longitudinal, ex post facto research design was adopted, employing a balanced panel data structure. Data were collected from audited annual reports and financial statements of ten deposit money banks over a ten-year period (2015–2025), yielding 100 bank-year observations. Panel data regression with Fixed Effects estimation and Driscoll-Kraay standard errors was employed, and mediation was tested using bootstrapping procedures with 5,000 resamples. Board independence (β = 0.019, p = 0.016) and board gender diversity (β = 0.023, p = 0.036) had significant positive effects on Return on Assets, while board size and board meeting frequency did not. NPLs exhibited a strong negative impact on financial performance (β = -0.141, p = 0.000). Mediation analysis revealed that NPLs partially mediated the relationship between board independence and performance (indirect effect = 0.010, 53% of total effect), and fully mediated the relationship between board gender diversity and performance (indirect effect = 0.012, 52% of total effect). No significant moderation effects were found. The Central Bank of Nigeria should enhance independence verification processes, transition gender diversity from aspiration to mandatory requirement, mandate that a minimum of 50% of credit/risk committee members be independent non-executive directors, and shift supervisory focus from meeting quantity to meeting quality. Bank boards should sustain and deepen board independence, accelerate gender diversity as a strategic priority, strengthen credit risk oversight, and review meeting effectiveness annually. The study concluded that board governance significantly influenced bank financial performance, but the mechanism through which this influence operated was substantially indirect, working through the quality of the loan portfolio. Strengthening board independence and gender diversity were identified as evidence-based imperatives for building resilient and profitable banks in Nigeria.