Impact of Credit Risk Pricing on Commercial Banks’ Loan Performance in Nigeria

The impact of credit risk pricing on commercial banks’ loan performance was investigated to find out whether credit risk pricing of commercial banks can be used to achieve stability of loan performance in Nigeria. Variables like interest rate (maximum and prime lending rates), total loan and advances (TL/A), the ratio of loan and advances to total deposit (LA/TD), non-performing loan ratio (NPLR), risk premium (RP), gross domestic product (GDP), inflation rate (INFR) proxy by consumer price index, and exchange rate (EXR), were estimated using VAR model with lag one period as the optimum lag length. Generally, the result for cointegration shows the existence of a long-run relationship between the variables. The VECM was also estimated for short run analysis and the result shows that the past values of RP and FXR have positive and significant impact in explaining the current/future path of NPLR in the short run in Nigeria while the past value of MLR have negative and significant impact in explaining NPLR in the current period at 5% level of significance. However, the VAR model result for bank specific factors show that only the past period NPLR is positive and statistically significant in explaining the current/future path of commercial banks’ loan performance proxy by NPLR at the 10% level of significance. Whereas for macroeconomic factors, the result of the VAR model shows that the value of FXR is negative and that of NPLR is positive and statistically significant in the past periods in explaining the current/future path of NPLR in Nigeria at 5% and 10% level of significance respectively. This may perhaps imply that commercial banks in Nigeria at the time of lending to their clients play down on these variables in building up their price for credit (interest rate). This may be as a result of the existence of relationship banking and compliance failure by banks in performing their astute functions. Hence, the variables can be used to determine the impact of credit risk pricing on commercial banks’ loan performance in Nigeria. The paper recommends that the risk premium should not be made only to capture market expectations but also the volatility and asymmetry involved in their hidden activities of relationship banking which have taken a central stage in Nigeria’s banking business. The CBN should also develop a more robust and practical risk pricing model peculiar to the Nigerian environment aside the template existing