Risk Management Practices and Financial Performance Among Deposit Money Banks in Nigeria

Abstract: The banking sector in Nigeria plays an important role in the nation's financial ecosystem and is a major driver of economic growth and development. However, despite this essential role, Nigerian banks are exposed to a wide range of risks that can significantly impact their financial stability and overall performance. This study investigated the effect of credit risk management on the financial performance of deposit money banks in Nigeria, using panel data from five selected banks. Employing both Random and Fixed Effects models, the research evaluated how credit risk influences financial performance, with Return on Assets (ROA) serving as the key performance indicator. The findings revealed a positive and significant relationship between credit risk and ROA, indicating that higher credit risk levels are associated with improved financial outcomes. This underscores the importance of robust credit risk management and well-structured governance frameworks in driving financial performance. The study concluded that credit risk can positively impact market-based performance, as investors may perceive higher risk as a signal of greater potential returns. It emphasized the importance of robust risk management practices and governance mechanisms in sustaining long-term financial health. Consequently, the study recommended that banks strengthen their credit risk management frameworks, promote a culture of transparency and ethical behavior, and conduct regular reviews of governance structures to ensure alignment with evolving regulatory and market conditions.