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Is there a nonlinear relationship between nonperforming loans and bank profitability? Evidence from dynamic panel threshold
Author(s) -
Bolarinwa Segun Thompson,
Olayeni Richard Olaolu,
Vo Xuan Vinh
Publication year - 2021
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.3262
Subject(s) - non performing loan , profitability index , nexus (standard) , return on equity , financial system , return on assets , business , economics , finance , computer science , loan , embedded system
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.