The Relationship and effect of Credit and Liquidity Risk on Bank Default Risk among Deposit Money Banks in Nigeria

Abstract

This paper on the relationship and effect of Credit and Liquidity Risk and on Bank Default Risk among Deposit Money Banks in Nigeria is aimed at assessing the extent to which the relationship between credit risk and liquidity risk influence the probability of bank defaults among deposit money banks, a study of First bank of Nigeria Plc. The study adopted experimental research design where questionnaires were administered to a sample size of eighty (80) respondents. The data obtained were presented in tables and analyzed using simple percentages. The formulated hypotheses were tested using the Pearson product moment correlation and chi- square statistical tool. The results of the study revealed that there is a positive relationship between liquidity risk and credit risk. This is based on the fact that an increase in credit risk (bad loan), the loan (asset) portfolio of such a bank is negatively affected causing an increase in bank illiquidity. Also, liquidity risk and credit risk jointly contribute to bank default risk. Based on the findings, it was recommended that internal loan and credit monitoring strategies should be implemented in full to ensure that loans and credit granted to customers are collected in full plus interest thereon and deposit money banks should not maintain excess liquidity simply because they want to effectively manage their liquidity position.