Effect of Inflation and Lending Rate on Non-Performing Loans: Evidence from Nigerian Deposit Banks

Abstract

Globally, the financial sector plays a crucial role in economic growth and development by virtues of its financial intermediary service. The factors that responsible for Non-Performing Loan (NPL) in both developed and emerging nations depend on the peculiarities or critical factors that classify such nation and have a multidimensional aspect. This study examined the effects of inflation and lending rate on NPLs using the fourteen DMBs listed in Nigerian stock exchange (from 2000- 2020). Panel data were obtained (from the annual reports of listed DMB) and analyzed. The panel data technique adopted the random effect model through the Housman test. Findings showed that Lending Rate (LDR) have positive but insignificant relationships with NPLs of banks and Inflation rate (INF) have negative but significantly effect on NPLs of banks. The study presents recommend that the policy makers should give serious attention to sudden forceful flow in inflation as a determinant of NPL as it affects not only Banking institutions alone but general financial system in Nigeria. And also, CBN should control the level of NPL by reducing the lending interest rate in Nigerian banks