Non-Performing Loans and Economic Growth in Nigeria: Evidence from an ARDL Approach (2007–2023)

Abstract

This study examined the effect of non-performing loans (NPLs) on economic growth in Nigeria from 2007 to 2023 using the Autoregressive Distributed Lag (ARDL) model. The study was motivated by the persistent rise in non-performing loans in the Nigerian banking sector despite various regulatory interventions by the Central Bank of Nigeria aimed at strengthening credit risk management and ensuring financial stability. The study employed both descriptive statistics and econometric techniques to analyse the short-run and long-run relationships between non-performing loans and selected macroeconomic variables. The empirical results revealed that non-performing loans have a significant negative effect on economic growth in the long run, indicating that rising loan defaults weaken banking sector stability and constrain productive investment. The results further showed that inflation has a positive and significant long-run relationship with economic growth, while government expenditure exhibits a significant negative effect. Interest rate was found to be statistically insignificant in the long run. In the short run, the results indicated mixed effects among the variables, with interest rate and government expenditure showing significant influence, while unemployment and inflation were largely insignificant. The error correction term was negative and statistically significant, confirming the existence of a long-run equilibrium relationship and a moderate speed of adjustment toward equilibrium. The study concludes that non-performing loans remain a key constraint to sustainable economic growth in Nigeria due to their adverse effects on credit availability and financial intermediation. The study recommends improved credit risk management, stronger regulatory enforcement, macroeconomic stability policies, and efficient allocation of government expenditure to enhance banking sector performance and stimulate economic growth