Macroeconomic Volatility and the Efficacy of Risk Management Practices in Nigerian Deposit Money Banks

Abstract

The complex interplay between internal risk management and external macroeconomic volatility shapes the financial performance of Nigerian Deposit Money Banks (DMBs). This study investigated the determinants of bank financial performance using balanced panel data from 2004 to 2023. Employing a panel regression model, the analysis assesses the impact of bank-specific risks, including Non-Performing Loan Ratio (NPLR) and Cost-to-Income Ratio (CIR), alongside macroeconomic factors, including Exchange Rate Volatility (ERV) and Interest Rate Volatility (IRV), on the bank's financial performance. The findings reveal that internal risk factors are the primary drivers of DMBs' performance. Both a high CIR (β=−0.630, p<0.01) and a high NPLR (β=−0.358, p<0.01) were found to have a strong, statistically significant negative impact on ROE. Macroeconomic volatility presents a dual effect: ERV is significantly detrimental to profitability (β=−16.03, p<0.05), while IRV is associated with higher ROE (β=52.514, p<0.01), suggesting opportunities for adept asset-liability management. The findings revealed that the negative impact of NPLR is significantly amplified during periods of high inflation volatility; while larger banks consistently achieve higher profitability, confirming the importance of economies of scale. The study concludes that while robust internal controls are paramount for bank performance, macroeconomic stability is essential for sector-wide resilience. Key recommendations include enhancing operational efficiency and credit risk frameworks within banks and fostering a stable policy environment to mitigate external shocks.