Title of Article: The Impact of Commercial Banks Nonperforming Loans on Financial Development in

Nigeria
Author(s): J.A.T. Ojo1 and R.O.C. Somoye2
Outlet:
Abstract: Endogenous growth literature predicts that the level of Non- performing Loans in the Commercial Banking
sector has significant impact on the level of financial growth and development in any country. This, in turn, according to
financial development literature, impacts negatively on the economic development of the country. The paper, therefore,
reviews the impact of commercial banks non-performing loans on financial development in Nigeria from 1981 to 2012. The
paper deploys unit root, causality, and co-integration tests and subsequently develops the Error Correction Models (ECM)
econometric techniques to measure the impact of non-performing loans on the level of financial development in Nigeria.
The paper also uses time-series data covering 1981-2012 obtained from the Central Bank of Nigeria Statistical Bulletin.
The results show that non-performing loans, commercial bank interest rate, liquidity ratio and inflation exert long-run
relationship and significant influence on financial development. Thus, policy measures aimed at stimulating financial
development through reduction in non-performing loans must be accompanied by measures to reduce the levels of interest
rate on credits and inflation and an increase in the level of liquidity of commercial banks in Nigeria. The paper
recommends that regulatory authorities need to put in place measures aimed at tackling excessive risk-taking at the source
and efficient financial policy that will continue to reduce the level of non-performing loans and the oversight functions of
the monetary authorities should be strengthened.
The problems of SME development, as identified and analyzed for required measures and schemes in our previous studies
have remained essentially the same and largely unattended to in the manner recommended.The growing interest being
shown for the development of SMEs could be seen as heeding the strong warning/advice in our previous study (Ojo,
1974 & 1975) that the neglect of the development of small industrial enterprises would continue to have retarding effects
on efforts to promote economic development in Nigeria.

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The attempt made here is to further explore how the SME development problems can be effectively addressed, in view of
the preponderant role and place of small scale enterprises in the whole set-up and structure of our economic activity and
social life. Banks and other formal financial institutions have been called upon without heeding, to employ appropriate
strategy to provide financial assistance to this priority sub-sector that has been for long neglected by these institutions in
the country, as strongly suggested in our studies about three decades ago.
To address effectively the identified financial and non-financial constraints and problems, we have proposed a Tripartite
Partnering and Strategic Alliance Approach. The recommended approach is to involve three parties made up of
banks/financiers for provision of finance, large industrial enterprises for SME mentoring and managerial support, and
government agencies to foster required enabling environment as well as formation of the partnership group.
As further recommended, it is expected that the main parties in the Tripartite Alliance Strategy have to perform their
respective roles in the manner shown. It is also important that the government and its agencies should play the required
coordinating role as well as ensuring that the needed infrastructural facilities and enabling environment are put in place
for the effective financing and development of SMEs.

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