FINANCIAL RESOURCE MANAGEMENT IN AI ERA: FINDING THE NEXUS BETWEEN NON-PERFORMING ASSETS (NPAs) AND FINANCIAL PERFORMANCE OF BANKING SECTOR IN NIGERIA
DOI:
https://doi.org/10.63996/njte.v25i1.76Keywords:
Non-Performing Assets, Loans, Financial Performance, Net Interest Margin, ROE, ROAAbstract
Many prior studies in Nigeria examine NPAs at a general level, with limited focus on the Nigerian banking sector, and presents inconsistent and mixed empirical findings, especially on the study of connection between rising NPAs on performance of banks and other financial institutions (BOFIs). Thus, the objective of this study is to critically examine the effect of NPAs on the financial performance of five (5) randomly selected commercial banks in Nigeria, especially in this era where AI-driven financial management opportunities abound. Ex-Post facto and Descriptive designs were deployed for this study. NPAs was the independent variable for the study measured by NPAs ratios (incorporating non-performing loans and non-performing advances ratios), while the dependent variable, financial performance, was measured with ROA, ROE and NIM metrics. Data was analyzed with Autoregressive Distributed Lag (ARDL) and Bounds Test in E-Views (version 10). The study found that a rise in NPAs causes a negative impact and forces -0.19.5%, -0.79.7% and -0.70.1% decrease in NIM, ROE and ROA, respectively, in the long run. This is the finding that leads to the conclusion that rising NPAs negatively affect the profitability, and overall financial performance, of BOFIs in Nigeria. Therefore, it was recommended that thorough corporate governance, loan exposures security validation, effective and flexible credit policy, and effective loan terms re-structuring with indicated red flags should be incorporated by BOFIs in Nigeria so to help bolster profitability and overall financial performance through guaranteed loan/asset recovery.
References
Access Bank (2025). Annual Report and Accounts. Available online at: https://www.firstbanknigeria.com/home/media/resources/ (Accessed on 05 August 2025).
Akerlof, G. O. (1970), The Market for “Lemon”. Quality Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, 488-500.
Arhinful, R., Gyamfi, B. A., Mensah, L., & Obeng, H. A. (2025). Non-performing loans and their impact on investor confidence: A Signaling Theory perspective—Evidence from US Banks. Journal of Risk and Financial Management, 18(7), 383.
Bofondi, M. & Gobbi, G. (2003). Bad Loans and Entry into Local Credit Markets. Bancad’Italia, Mineo.
Christaria, F., & Kurnia, R. (2016). The impact of financial ratios, operational efficiency and non-performing loan towards commercial bank profitability. Accounting and Finance Review (AFR), 1(1), 43-50.
Chun, S. H., & Ardaaragchaa, N. (2024). Analysis of factors affecting the loan growth of banks with a focus on non-performing loans. Journal of Risk and Financial Management, 17(5), 203.
FCMB (2025). Annual Report and Accounts. Available online at: https://www.fcmb.com/sustainability/assets/reports/FCMB%20ANNUAL%20REPORT%202023.pdf (Accessed on 05 August, 2025).
First Bank (2025). Annual Report and Accounts. Available online at: https://www.firstbanknigeria.com/home/media/resources/ (Accessed on 05 August 2025).
Forbes. (2025). The opportunities and challenges of harnessing AI and ML for financial risk management. Forbes Technology Council.
Fringe Global. (2024). AI-driven predictive analytics for financial risk management. International Journal of Advanced Research and Innovation.
Gauss. (2025). Benefits and use cases of AI in finance. Gauss HR.
Gjeçi, A., Marinč, M., & Rant, V. (2023). Non-performing loans and bank lending behaviour. Risk Management, 25(1), 7.
Gnawali, A. (2018). Non-Performing Asset and its Effects on Profitability of Nepalese Commercial Banks. National Journal of Arts, Commerce & Scientific Research Review, 5(9), 39–47.
Grzelak, A., & Staniszewski, J. (2025). Relative return on assets in farms and its economic and environmental drivers. Perspective of the European Union and the Polish region Wielkopolska. Journal of Cleaner Production, 493, 144901.
Gupta, A., Chen, J., & Lee, S. (2025). Responsible AI in robo-advisors: A roadmap for fair and adaptive decision-making. arXiv preprint arXiv:2509.09922.
Hastuti, I. N., Wibowo, R. E., & Nurcahyono, N. (2024, May). The Effect of Capital Adequacy Ratio, Non-Performing Loan and Debt Equity Ratio on Financial Performance. In Economics and Business International Conference Proceeding (Vol. 1, No. 1, pp. 13-24).
Idigbe, A. (2022). Distressed Banks and Asset Management Companies: Evaluating AMCON as a Bank Resolution Tool for Managing Non-Performing Loans in Nigeria. In Bank Insolvency Law in Developing Economies (pp. 18-50). Routledge.
Rahaman, S. M., & Sur, D. (2025). Identifying key drivers of non-performing assets in Indian public sector banks: A panel data analysis. IIM Kozhikode Society & Management Review, 14(1), 7-23.
Rajha, K. S. (2017). Determinants of non-performing loans: Evidence from the Jordanian banking sector. Journal of Finance and Bank Management, 5(1), 54-65.
Kasie, E. G. Onyenwe, N. I. & Rita, N. N. (2023). Non-performing loans and profitability of selected deposit money banks in Nigeria (2008-2021). International Journal of Research in Finance and Management 2023; 6(1), 188-196. https://doi.org/10.33545/26175754.2023.v6.i1c.209
Kayani, U. N., Gan, C., Rabbani, M. R., & Trichilli, Y. (2024). Is short-term firm performance an indicator of sustainable financial performance? Empirical evidence. Studies in Economics and Finance, 41(3), 619-637.
Kulkarni, S., Cristofaro, M., & Ramamoorthy, N. (2024). Evolutionary sensemaking: a managerial metacognitive dynamic capability to reduce information asymmetry. Management Decision, 62(13), 201-222.
Kumari, R., Singh, P. K., & Sharma, V. C. (2017). Impact of Non-Performing Assets (NPAs) on Financial Performance of Indian banking Sector. Journal of Commerce & Management, 6(1), 122–133.
Mallik, R., Puri, S., Bhansali, A., Manikandan, R., & Rahunathan, L. (2024). Defaulter detection based on Spearman correlation with hyper tuned SVM classification for preventing non-performing assets occurring in bank. Multimedia Tools and Applications, 1-23.
Mogaji, B. S. (2024). Treasury Single Account and Fraud Prevention in Nigeria Federal Inland Revenue Service (FIRS). ABU Journal of Public Administration, 12(1), 1-19.
Mohd, Z., A. Karim, C. Sok-Gee., and H. Sallahundin (2010). Bank Efficiency and Non- Performing Loans: Evidence from Malaysia and Singapore. Prague Economic Papers, 2.
Pagaon, M. & Jappelli, T. (1993). Information Sharing in Credit Markets. The Journal of Finance, 48(5), 1693-1718.
Pamuji, A. E., Supandi, A. F., & Sa’diyah, M. (2022). Islamic financial institutions as strengthening the economy of the ummah (study on the application of shariah agreements in Islamic financial institutions). OECONOMICUS Journal of Economics, 7(1), 24-36.
Obeid, R. (2024). Factors affecting net interest margin in the banking sector: Evidence from the Arab region. Journal of Governance and Regulation/Volume, 13(1).
Ocrolus. (2025). Benefits of AI in financial services. Ocrolus Blog.
Saliba, C., Farmanesh, P., & Athari, S. A. (2023). Does country risk impact the banking sectors’ non-performing loans? Evidence from BRICS emerging economies. Financial Innovation, 9(1), 86.
Singh, A. (2015). Performance of credit risk management in Indian commercial banks. International Journal of Management and Business Research, 5(3), 169–188.
Somoye , R. O. C. (2010), The Variation of Risks on Non-Performing Loans on Pank performances in Nigeria. India Journal of Economics and Business, 9.
Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. The American economic review, 71(3), 393-410.
Tijani, Y. A., Umar, S., Aliyu, I. A., & Dantsoho, A. M. (2024). The Role of Capital Adequacy Ratio on the Relationship Between Asset Quality and Performance of Commercial Banks in Nigeria. African Banking and Finance Review Journal, 17(17), 212-228.
Umar, N. A. (2022). Examining the determinants of loan default among microfinance banks’ borrowers in Kano State, Nigeria. International Journal of Financial, Accounting, and Management, 3(4), 335-347.
United Bank of Africa (2025). Annual Report and Accounts. Available online at: https://www.ubagroup.com/investors/financial-reports/ (Accessed on 25 July 2025).
Vibhute, N. S., Jewargi, D. C. B., & Haralayya, D. B. (2021). Study on Non-Performing Assets of Public Sector Banks. Iconic Research And Engineering Journals, 4, 52-61.
Visani, N. S., & Patel, K. (2025). NET NPA and Profit Correlation in Cooperative Banks: Case Study of Ahmedabad and Kalupur Co-Op. Banks. Vidhyayana-An International Multidisciplinary Peer-Reviewed E-Journal-ISSN 2454-8596, 10(si3).
Wadhwa, R. & Ramaswamy, K. (2020). Impact of NPA on Profitability of Banks. International Journal of Engineering Technology and Management Sciences, 4(3), 1-8. https://doi.org/10.46647/ijetms.2020.v04i03.001
Wang, Y., Liu, H., & Zhao, Q. (2024). Generative business process AI agents in ERP systems. arXiv preprint arXiv:2506.01423.
Zenith Bank (2025). Annual Report and Accounts. Available online at: https://www.annualreports.com/Company/zenith-bank-plc (Accessed on 01 August 2025).
