DETERMINANTS OF INCOME SMOOTHING BY MANAGING LOAN LOSS PROVISIONS BY BANKS IN NIGERIA: AN EMPIRICAL ANALYSIS

This study empirically analyses the determinants of income smoothing by banks through managing loan loss provisions in Nigeria. The objective of the study is to investigate the association of earnings, GDP growth rate and loan growth with loan loss provisions and assess whether or not bank managers lend prudently in Nigeria. We use 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, we find evidence that suggests income smoothing by banks through loan loss provisioning. We also find evidence of pro-cyclical behaviour of banks in loan loss provisioning; as loan growth is negatively associated with loan loss provisions. This study therefore, recommends the need for bank regulators to monitor rapid loan growth in Nigerian banks to ensure that they are growth-supportive and the credit quality arising from such credit growth does not distort profitability and solvency of banks.