The Nexus Between Oil Price Shocks, Bank Credit Cycles, and Non Performing Loans (NPLS) in Nigeria: A Structural Var and Panel Data Analysis

Abstract

This study carried out a structural VAR and panel analysis of the nexus between oil price shocks, bank credit cycles, and non-performing loans (NPLs) in Nigeria. The objectives were to determine the impact of oil price shock, bank credit, exchange rate and interest rate on non performing loans in Nigeria. Expost facto design was adopted. The study covered the period 1991 to 2024. Secondary data were sourced from Central Bank of Nigeria Statistical Bulletin and Nigeria Deposit Insurance Corporation annual report. Data were analyzed using descriptive statistics, unit root test and FMOLS. However, VAR and variance decomposition were used to determine the shock each independent variable had on non-performing loans. Findings showed that Oil price and interest rate had a negative relationship with non performing loans while bank credit and exchange rate had positive relationship with non performing loans. The variance decomposition result showed that bank credit and exchange rate shocks have larger effects on non-performing loans in Nigeria. However, a low shock (or relatively weak impact) of crude oil prices and interest rates on non-performing loans (NPLs) in Nigeria was found. Contrary to most views, oil price shocks is not responsible for most cases of non-performing loans in Nigeria, rather exchange rate and other economic variables not considered in this study. Based on the findings, it was recommended among others that the government should intensify efforts to diversify the Nigerian economy by promoting agriculture, manufacturing, solid minerals, technology, and other non-oil sectors. A more diversified economy will reduce the indirect transmission of oil price shocks to the banking sector, improve business resilience, and strengthen the capacity of borrowers to meet their loan obligations. Deposit Money Banks should adopt more rigorous credit appraisal, continuous loan monitoring, and risk-based lending practices to prevent excessive credit expansion during economic booms.