Is there a nonlinear relationship between nonperforming loans and bank profitability? Evidence from dynamic panel threshold

This study examines the threshold effect in the nonperforming loans–profitability nexus within the Nigerian banking industry. Using the innovative dynamic panel threshold of Seo, Kim, and Kim (2019), the work documents threshold levels of 3.5% and 5.0% of nonperforming loans for return on average as...

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Veröffentlicht in:Managerial and decision economics 2021-04, Vol.42 (3), p.649-661
Hauptverfasser: Bolarinwa, Segun Thompson, Olayeni, Richard Olaolu, Vo, Xuan Vinh
Format: Artikel
Sprache:eng
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Zusammenfassung:This study examines the threshold effect in the nonperforming loans–profitability nexus within the Nigerian banking industry. Using the innovative dynamic panel threshold of Seo, Kim, and Kim (2019), the work documents threshold levels of 3.5% and 5.0% of nonperforming loans for return on average assets (ROAA) and return on average equity (ROAE), respectively. These levels of nonperforming loans ensure equilibrium profitability without stability trade‐off in the industry. Similarly, the robust models suggest the threshold of 5.2% and 2.81% of impaired loans for optimal ROAA and ROAE, respectively. The results are important for policy formulations. It is recommended that the Central Bank of Nigeria (CBN) should review the 5% threshold nonperforming loans adopted in the industry in 2019 prudential guidelines to ensure stability in the Nigerian banking industry.
ISSN:0143-6570
1099-1468
DOI:10.1002/mde.3262