(Banking and Finance Department, Nasarawa State University, Keffi, 2015-10-01) Abdulkarim, Shaibu Alhassan
This study empirically analyses the determinants of capital through managing loan loss provisioning by Deposit Money Banks in Nigeria. The objective of the study is to investigate the association of capital and earnings with loan loss provisions and assess whether or not bank managers lend prudently in Nigeria. The study uses banking and economic data for a panel of eleven banks quoted on the Nigerian Stock Exchange over the period 2002-2011. Using dynamic panel data econometric technique, the study finds evidence that indicates that loan loss provisions have a pro-cyclical effect, as they are negatively related to capital. However, this pro- cyclical behaviour o f loan loss provisions is partially mitigated by income smoothing practice.
This study therefore supports the implementation of dynamic loan loss provisions model in Nigeria in which the expected losses are covered by loan loss provisions while unexpected losses are covered by capital.