Effect of Financial Risk on Profitability Performance of Quoted Deposit Money Banks in Nigeria

Abstract

Exposure of businesses to risk has become a very serious issue for survival in life. Nigeria had for several years been experiencing one form of financial distress or the other. The series of poor performance experienced by financial institutions in Nigeria were attributed to inadequate risk management, poor monitoring systems and ineffective board members. This study examines the effect of financial risk on profitability performance of deposit money banks in Nigeria. The population comprise 22 deposit money banks and sample size of 14 deposit money banks in Nigeria. The proxies comprise of credit risk, interest rate risk, liquidity risk and return on asset of the sampled banks in Nigeria. The hypotheses were tested using panel random effect regression model after conducting some diagnostic tests such as Pearson correlation and Shapiro-Wilk normality test to accurately estimate the model. The results show that credit risk (CR), interest rate risk (IRR) and liquidity risk (LR) have significant effects on return on assets of deposit money banks in Nigeria. The study recommend that the deposit money banks in Nigeria should ensure that all the conditions required before granting loans to their customers should be met to enhance their profitability. Also, the banks should manage their liquidity risk by striking a balance between excess cash and cash trapping to enhance the profitability of the deposit money banks in Nigeria.