Received: 22 June 2020 Revised: 8 October 2020 Accepted: 1 November 2020

DOI: 10.1002/mde.3262

RESEARCH ARTICLE

Is there a nonlinear relationship between nonperforming loans

and bank profitability? Evidence from dynamic panel threshold

Segun Thompson Bolarinwa1,2 | Richard Olaolu Olayeni3 | Xuan Vinh Vo2

1
Department of Economics, Chrisland
University, Abeokuta, Ogun State, Nigeria This study examines the threshold effect in the nonperforming loans–profitability
2
Institute of Business Research and CFVG Ho nexus within the Nigerian banking industry. Using the innovative dynamic panel
Chi Minh City, University of Economics Ho Chi
Minh City, Vietnam threshold of Seo, Kim, and Kim (2019), the work documents threshold levels of 3.5%
3
Department of Economics, Faculty of Social and 5.0% of nonperforming loans for return on average assets (ROAA) and return on
Sciences, Obafemi Awolowo University, Ile-Ife,
average equity (ROAE), respectively. These levels of nonperforming loans ensure
Nigeria
equilibrium profitability without stability trade-off in the industry. Similarly, the
Correspondence
robust models suggest the threshold of 5.2% and 2.81% of impaired loans for optimal
Segun Thompson Bolarinwa, Department of
Economics, Chrisland University, Abeokuta, ROAA and ROAE, respectively. The results are important for policy formulations. It is
Ogun State, Nigeria.
recommended that the Central Bank of Nigeria (CBN) should review the 5%
Email: bolarinwathompson@yahoo.com
threshold nonperforming loans adopted in the industry in 2019 prudential guidelines
to ensure stability in the Nigerian banking industry.

1 | I N T RO DU CT I O N
An important issue of concern between scholars, bank managers, and
policymakers in the banking literature is the nonperforming loans,
particularly in the post-global financial crisis (GFC) period. This
concern has been volubly expressed in more recent studies including
Kjosevski, Petkovski, and Naumovska (2019), Panta (2018), and
Dimitrios, Helen, and Mike (2016). Scholars such as Nkusu (2011),
Reinhart and Rogoff (2011), Alandejani and Asutay (2017), and
Us (2018) have shown that high nonperforming loan is an early signal
in the banking system. The American Savings and loans crisis, the
Asian nonperforming loans cycles, the GFC, and the Nigerian banking
crises are all evidenced by a high precrisis build-up of nonperforming
loans (Manz, 2019; Salas & Saurina, 2002; Rottke & Gentgen, 2008).
Similarly, mounting nonperforming loan is a major foundation of a
banking crisis, failure, and systemic risk (Amuakwa-Mensah,
Marbuah, & Ani-Asamoah Marbuah, 2017; Demirgüç-Kunt &
Detragiache, 1998; Dimitrios et al., 2016; González-Hermosillo, 1999)
and asset quality (Meeker & Gray, 1987; Yurttadur, Celiktas, &
Celiktas, 2019). Moreover, high nonperforming loans hinder bank
loans mobilization function. Thus, they lead to undesirable conse-
quences on economic growth, unemployment, and other macroeco-
nomic indicators (Kjosevski & Petkovski, 2017; Rosenkranz & Lee,
2019; Yang, 2017). More importantly, the issue of the acceptable level
of nonperforming loans has created a disagreement between the
Central Bank of Nigeria (CBN) and bank managers after the introduc-
tion of the 5% threshold in the CBN prudential guidelines (2019).
While the CBN argue that 5% threshold address the high level of
nonperforming loans in banks' loan portfolio in the Nigerian economy,
the bank managers argue that this policy reduces bank loan
mobilization for the real sector and profitability.
The evidence on nonperforming loans–profitability nexus has
increased globally in recent times. While the literature is settled on
the negative effect of nonperforming loans on bank profitability
(Kjosevski et al., 2019; Kjosevski & Petkovski, 2016; Manz, 2019;
Mazreku, Morina, Misiri, Spiteri, & Grima, 2018; Panta, 2018; Patwary
& Tasneem, 2019), an important unresolved issue is the appropriate
level of nonperforming loans that simultaneously guarantees optimal
profitability and stability. This is because an inapt level of nonperform-
ing loans has diverse effects on the banking industry (Ojo &
Somoye, 2014; Ouhibi, Ezzeddine, & Hammami, 2017; Radivojevic &
Jovovic, 2017). First, imposing a lower threshold than necessary
ultimately forces banks to reject productive and promising projects to
maintain the imposed stipulated threshold in the loan portfolio. This
inappropriate stipulated level reduces credit mobilization and profit-
ability simultaneously. On the other hand, excessive threshold tends
to increase unproductive loans in the loan portfolio. The consequence
is a high systemic risk level and bank failure (Kjosevski et al., 2019;
Kumar, 2015; Kuzucu & Kuzucu, 2019; Louzis, Vouldis, &
Metaxas, 2012). Thus, the expediency of adopting an appropriate

Manage Decis Econ. 2021;42:649–661. wileyonlinelibrary.com/journal/mde © 2021 John Wiley & Sons, Ltd. 649
650 BOLARINWA ET AL.

nonperforming loan threshold for bank optimal profitability, stability,
and macroeconomic performance cannot be stressed enough.
The global concern for the determination of the appropriate level
of nonperforming loans has mounted in the recent is the recent policy
discourse. The timeliness of this concern is important considering the
build-up of nonperforming loans that heralded the GFC (Table 1).
Following this development, the CBN in August 2019 formulated the
policy of threshold of 5% nonperforming loans for deposit money
banks in the Nigerian banking industry. The policy took effect in
January 2020. Hence, it is useful to examine the appropriate level of
nonperforming loans for optimal profitability without stability trade-
off. As argued by the CBN, 5% nonperforming threshold would ensure
equilibrium profitability and stability in the Nigerian banking industry
(CBN, 2018). Tracking the policy, this paper beams searchlight on the
appropriateness of the threshold level of nonperforming loans in the
industry vis-à-vis the CBN stipulated 5% threshold policy. The policy
is a welcomed development as it has important implications for
profitability, competition, and stability. Asides from the Nigerian
banking industry, this work documents the threshold level in the
nonperforming loans–bank profitability nexus, unlike extant studies
that assume linear relationship in the literature (Rajha, 2017;
Rosenkranz & Lee, 2019; Shingjergji, 2013; Ugoani, 2016; Vera-Gilces,
Camino-Mogro, Ordeñana-Rodríguez, & Cornejo-Marcos, 2020;
Yurttadur et al., 2019).
To achieve the goal of this study, the paper adopts the dynamic
panel threshold method of Seo and Shin (2016) made practicable with
Seo, Kim, and Kim (2019). Built on the framework of the generalized
method of moments (GMM) framework, the technique simultaneously
addresses inherent endogeneity and simultaneity issues in the nexus
and the threshold level of nonperforming loans. Besides, the paper
adopts another measure of nonperforming loans, namely, impaired
loans. A few studies in the literature (Kjosevski & Petkovski, 2016;
Kjosevski et al., 2019) have argued that impaired loan focuses on the
quality of loans rather than the level of nonperforming loans. Thus, it
is robust and could better predict nonperforming loans. This measure
seems more appropriate considering the novelty of the policy in the
Nigerian banking industry. Second, from the policy stance, the Inter-
national Monetary Fund (IMF) argues that the measure is the best for
examining the quality of loan portfolio while at the same time helps
predict the level of nonperforming loans (IMF, 2007). Third, the defini-
tion of nonperforming loans is not yet harmonized in the literature
(Jakubík & Reininger, 2014). However, the measure is internationally
recognized within the framework of international accounting and
financial reporting standards; hence, it is adopted in this paper to con-
tribute to the growing awareness.
Moreover, unlike other studies that adopt the ratio of nonper-
forming loans to gross loans (Castro, 2012; Dimitrios et al., 2016;
Fainstein & Novikov, 2011; Jimenez & Saurina, 2005; Pestova &
Mamonov, 2012), loan loss reserves (Arpa, Giulini, Ittner, & Pauer,
2001; Bikker & Hu, 2002; Glogowski, 2008; Laidroo & Männasoo,
2014; Pain, 2003), and default rates (Trenca & Benyovszki, 2008;
Virolainen, 2004), this paper adopts both nonperforming loans and
impaired loans. Whereas the nonperforming loan is a regulatory term
that documents how lending is treated in the prudential regulatory
framework, the impaired loan is closely associated with how lending is
reported in the financial statements. Also, the impaired loan is a

TABLE 1 Nonperforming loans in developed and developing countries

Years SA India China Brazil Nigeria United States United Kingdom Switzerland Sweden Canada
2000 NA 12.8 22.4 8.3 22.6 1.1 2.5 4.1 1.6 1.3
2001 3.1 11.4 29.8 5.6 19.7 1.3 2.6 2.3 1.5 1.5
2002 2.9 10.4 26 4.5 21.4 1.4 2.6 1.8 1.4 1.6
2003 2.4 8.8 20.4 4.1 20.5 1.1 2.5 1.3 1.9 1.2
2004 1.8 7.2 13.2 2.9 21.6 0.8 1.9 0.9 1.1 0.7
2005 1.8 5.2 8.6 3.5 NA 0.7 1.0 0.5 0.8 0.5
2006 1.1 3.5 7.1 3.5 9.3 0.8 0.9 0.3 0.8 0.4
2007 1.4 2.7 6.2 3.0 9.5 1.4 0.9 0.3 0.1 0.4
2008 3.9 2.4 2.4 3.1 6.3 3.0 1.6 0.9 0.5 0.8
2009 5.9 2.2 1.6 4.2 37.3 5.0 3.5 1.1 0.8 1.3
2010 5.8 2.4 1.1 3.1 20.1 4.4 4.0 0.9 0.8 1.2
2011 4.7 2.7 1.0 3.5 5.8 3.8 4.0 0.8 0.7 0.9
2012 4.0 3.4 0.95 3.0 3.7 3.3 3.6 0.8 0.7 0.7
2013 3.6 4.0 0.99 2.9 3.4 2.5 3.1 0.8 0.6 0.6
2014 3.3 4.4 1.3 2.9 3 1.9 1.7 0.7 1.2 0.5
2015 3.1 5.9 1.7 3.3 4.9 1.5 1.0 0.8 1.2 0.5
2016 2.9 9.2 1.8 3.9 12.8 1.3 0.9 0.8 1.0 0.6
2017 NA 10 NA 3.6 NA 1.1 NA NA 1.1 0.5

Note: Based on Global Financial Development, World Bank Database, 2020. Less than 5, greater than 5 but less than 10, and greater than 10 indicate
normal, build-up, and alarming levels of nonperforming loans, respectively; NA indicates nonavailable.
BOLARINWA ET AL.
broader risk coverage (IMF, 2007). The rest of the paper is structured
as follows. Section 2 highlights a brief literature review whereas
Section 3 presents trends of nonperforming loans. Methodology and
empirical results are addressed in Sections 4 and 5. Section 6
concludes the study.
2 | BRIEF LITERATURE REVIEW
The literature on the determinants of bank profitability is vast.
Scholars have documented evidence from developing and developed
economies. These authors have adopted panel of countries
(Athanasoglou, Brissimis, & Delis, 2008; Bourke, 1988; Capraru &
Ihnatov, 2015; Dietrich & Wanzenried, 2011, 2014; Flamini,
McDonald, & Schumacher, 2009; Petria, Capraru, & Ihnatov, 2015;
Short, 1979) and the individual banking industry (Abid, Ouertani, &
Zouari-Ghorbel, 2014; Akinlo & Emmanuel, 2014; Amuakwa-Mensah
et al., 2017; EL-Maude, Abdul-Rahman, & Ibrahim, 2017; Alandejani &
Asutay, 2017; Ali, 2018; Bolarinwa, Obembe, & Olaniyi, 2019; Gabriel,
Victor, & Innocent, 2019; Atoi, 2019). Moreover, several studies
examined the determinants using firm-level, industry-level, and the
macroeconomic determinants separately whereas other studies have
simultaneously adopted these variables (Bolarinwa et al., 2019).
Because the present study concentrates on the firm-level determi-
nants, this review focuses on the firm-level determinants. Following
the literature, bank size, capitalization, nonperforming loans, growth
of deposits, and efficiency are the major variables (Adelopo, Lloydking,
& Tauringana, 2018; Athanasoglou et al., 2008; Bolarinwa et al., 2019;
Capraru & Ihnatov, 2015; Chowdhury & Rasid, 2015; Dietrich &
Wanzenried, 2011, 2014; Garcia & Guerreiro, 2016; Petria
et al., 2015; Salike & Ao, 2017).
Studies have documented a positive effect of bank size on
profitability (Bolarinwa et al., 2019; Chowdhury & Rasid, 2015;
Dietrich & Wanzenried, 2011; Garcia & Guerreiro, 2016; Sufian,
2012). These works argue that bank size allows banks to enjoy econo-
mies of scale thereby increasing profitability. On the other hand,
negative effects of bank size attributed to diseconomies of scale and
manifesting in forms of rigidities, inertia, the bureaucracy that
characterized big organizations (Athanasoglou et al., 2008; Jakubík &
Reininger, 2014; John, 2018; Khemraj & Pasha, 2016; Kjosevski &
Petkovski, 2017; Olaniyi, Simon-Oke, Obembe, & Bolorinwa, 2017;
Petria et al., 2015) have been reported. Capitalization is another
important determinant in the literature (Kjosevski et al., 2019;
Klein, 2013; Kumar & Kishore, 2019). Similarly, studies argue that
efficient banks yield higher profitability. These studies adopt
cost-income ratio, operating expenses, funding ratio, and expenses
management (Louzis et al., 2012; Mazreku et al., 2018; Ugoani, 2016).
Recent studies also adopted standard measures of efficiency: DEA
and SFA (Bolarinwa & Adegboye, 2020; Capraru & Ihnatov, 2015).
Moreover, the growth of deposit is another determinant of bank
profitability (Le, Tzeremes, & Ngo, 2020; Panta, 2018). This strand of
the literature argues that bank deposit is a relatively cheap bank asset
for banks; hence, it tends to increase profitability.
651
Moreover, an important determinant of bank profitability is
nonperforming loans. The literature in this regard adopts several
terms such as credit risk, nonperforming loans, loan loss provision,
and risk-weighted assets (Adelopo et al., 2018; Azad, Azmat, &
Hayat, 2020; Bakoush, Abouarab, & Wolfe, 2019; Campmas, 2020;
Dietrich & Wanzenried, 2014; Martins, Serra, & Stevenson, 2019;
Pessarossi, Thevenon, & Weill, 2020; Petria et al., 2015; Salike &
Ao, 2017; Le, Tzeremes, & Ngo, 2020; Ünvan & Yakubu, 2020). While
extant literature has documented a negative effect of nonperforming
loans on bank profitability, an issue yet to be resolved in the literature
is the threshold level of nonperforming loans required for ensuring
adequate profitability in the banking industry without trading off
stability. This paper deviated from extant works by documenting the
threshold level of nonperforming loans in the nexus. In particular, the
philosophical stance of this paper differs from the long list of papers
in the literature (Alandejani & Asutay, 2017; Amuakwa-Mensah,
Marbuah, & Ani-Asamoah, 2017; Atoi, 2019; Gabriel et al., 2019;
John, 2018; Kjosevski et al., 2019; Kure, Adigun & Okedigba, 2017;
Kuzucu & Kuzucu, 2019; Laila, 2017; Rosenkranz & Lee, 2019;
Us, 2018). To address this issue, the dynamic threshold model of
Seo et al. (2019) built on the GMM method is adopted. The
method enables the policymakers to determine the threshold level of
nonperforming loans that guarantee stability in the banking industry.
Also, determining the appropriate threshold level of nonperforming
loans enables banking managers to understand the threshold level to
work with in setting up loan's portfolio to avoid the unnecessary
bad debt.
3 | T R E ND S O F NO N P E RF O RM I N G L O A N S
Following the literature, studies have documented that nonperforming
loans build-up during the GFC (Dimitrios et al., 2016; Panta, 2018). In
line with this submission, this paper examines the trends of nonper-
forming in both developed and developing countries between 2000
and 2017, using five developing countries including China,
South Africa, Brazil, India, and Nigeria and other developed countries
including the United States, the United Kingdom, Switzerland, Swe-
den, and Canada. As shown in Table 2, nonperforming loans slightly
increased during the GFC in developed economies. For instance,
Canada, Sweden, the United States, and Switzerland all reported the
highest level of nonperforming loans in 2009 during the GFC period
spanning between 2005 and 2017. Of course, 2009 happened to be
the peak year of the GFC. Thus, the view that GFC accounted for the
build-up of nonperforming loans in the banking industries globally is
validated. However, during this period, the nonperforming loans in
the banking industries in developed economies are not higher than
the normal 5%.
Further examination of Table 2 shows that nonperforming is very
high in the banking industries in developing economies. For instance,
Nigeria, China, and India have more periods of build-ups and alarming
levels of nonperforming loans than the normal. The normal being 5%
following the CBN prudential guidelines (2019). Among these
652 BOLARINWA ET AL.

TABLE 2 Data, measurement, and sources

Variables Indicator Measurement Source A priori (Currency)

Return on average assets
Return on average equity
Nonperforming loans
Impaired loans
Bank size
Capitalization
ROAA Average of the ratio of PBT to total assets Osiris Bank Database Dollars ($)
ROAE Average of the ratio of PBT to total equity Osiris Bank Database Dollars ($)
NPL The ratio of nonperforming. Loans to gross loans Osiris Bank Database − Dollars ($)
IMP The ratio of impaired to gross loans Osiris Bank Database − Dollars ($)
SIZE Natural logarithm of the total assets Osiris Bank Database + Dollars ($)
CAP Natural logarithm of equity Osiris Bank Database + Dollars ($)

countries, the Nigerian financial sector recorded the highest nonper-
forming loans than some other developing economies did. Hence, it is
important to examine the specific determinants of nonperforming
loans within the Nigerian banking industry. Besides, the Nigerian
banking industry matter for other African countries is the biggest
economy. It is also argued that systemic risk spillover from developing
economies affect the Nigerian banking industry and its nonperforming
loans (Chadwick & Ozturk, 2018; Civcir & Varoglu, 2019). Concentrat-
ing on Nigeria, this work further examines the trends of nonperform-
ing loans in the Nigerian banking industry using the IMF data. Figure 1
shows that the GFC spillover spurs nonperforming loans in the
Nigerian banking industry between 2008 and 2009. These periods
witnessed the highest level of nonperforming loans between 2006
and 2018. Thus, the work confirms the GFC spillovers on developing
economies (Chadwick & Ozturk, 2018; Civcir & Varoglu, 2019). As
shown in Figure 1, although nonperforming loan has reduced in recent
times globally, it is still very high in Nigeria compared with the level in
developed economies of the United Kingdom, Switzerland, Canada,
and the United States.
Asides from the macrodata used in Table 2 and Figure 1, the work
also presents the trends of nonperforming loans and impaired loans
among the selected commercial banks in the Nigerian banking indus-
try. These are shown in Figures 2 and 3. The nonperforming loan in
the industry is relatively higher than 10% approved between 2004
and 2019. Moreover, Figure 3 also shows that impaired loan is higher
in the Nigerian banking industry relatively to nonperforming loans.
This may not be unconnected with the robustness of impaired loans.
Considering the consequences of the high level of nonperforming and
impaired loans on the stability of the banking industry, financial
sector, and macroeconomic stability, it is expedient to undertake
this work.
4 | METHODOLOGY
4.1 | Technique of analysis: Dynamic panel
threshold model
The study adopts the dynamic panel threshold model of Seo and
Shin (2016). This is practicable by the work of Seo et al. (2019). Built
on the principles of GMM, the method addresses the inherent
endogeneity and simultaneity which cannot be ruled out in the nexus
between nonperforming loans and profitability. At the same time, the
method further reports the threshold level between nonperforming
loans and bank profitability. The details of the method can be found in
Seo and Shin (2016) and Seo et al. (2019).
4.2 | Empirical model
Following Seo and Shin (2016) and Seo et al. (2019), the empirical
model for the threshold effect in the nonperforming loans–
profitability nexus in the Nigerian banking industry is specified as

α1 PROFit −1 + θ11 NONPit + θ12 SIZEit + θ13 CAPit + μi + εit if qit ≤ Υ
ð1Þ
α2 PROFit− 1 + θ21 NONPit + θ22 SIZEit + θ23 CAPit + μi + εit if qit > Υ
for i = 1, …, n; t = 1,…T,

F I G U R E 1 Nonperforming loans in
the Nigerian banking industry. The graph
explains the trends of nonperforming
loans between 2007 and 2018. (Based on
IMF Global Stability Report, 2019)
[Colour figure can be viewed at
wileyonlinelibrary.com]
BOLARINWA ET AL. 653

FIGURE 2 Nonperforming loans in the Nigerian banking industry [Colour figure can be viewed at wileyonlinelibrary.com]

FIGURE 3 Impaired loans in the Nigerian banking industry [Colour figure can be viewed at wileyonlinelibrary.com]

where PROF, NONP, SIZE, and CAP are profitability, nonperforming (ROAA) and return on average equity (ROAE). In the model, qit is the
loans, bank size, and capitalization, respectively. The details on the mea- transition variable and is the threshold parameter in the model.
surement of variables are provided in Table 2. Furthermore, the paper Equation 1 is estimated using the first difference generalized method of
adopts two measures of bank profitability: return on average assets moments (FD-GMM) which allows for both regressors and transition
654 BOLARINWA ET AL.

variable to be endogenous. Following extant studies that emphasize the
endogeneity and simultaneity issues in the nonperforming loans and
profitability nexus, the study runs the dynamic panel threshold model
built within the difference GMM framework to address these pitfalls.
4.3 | Data, measurement, and sources
This work relies on the Osiris Bank database managed by Bureau van
Dijk for the data adopted in the paper. The database stores firm-level
data of listed firms across the world. All variables are expressed in US
dollars. The period adopted in the study spans between 2011 and
2018 while the sample, respectively, consists of 14 and 12 banks of
the 18 listed Nigerian banks for nonperforming loans and impaired
loans models. Data for the impaired loan is only available for 12 banks.
The remaining information is provided in Table 2.
5 | EMPIRICAL RESULT AND DISCUSSION
Before examining the threshold relationship between nonperforming
loans and profitability, we first examine the descriptive statistics to
have an overview and characteristics of the variables adopted in the
study. Table 3 provides descriptive statistics. The table shows that the
average profitability of Nigerian banks is 1.4 and 8.1 for ROAA and
ROAE, respectively, between 2008 and 2018. This is higher than the
median for ROAA (1.3) and lower for a median of ROAE (9.0) implying
that the distribution of ROAA is relatively skewed to the right and
negatively skewed to the left for ROAE. Thus, according to ROAA,
majority of banks in the Nigerian banking industry do not have profit-
ability lower than the mean. The opposite result is reported for ROAE.
The contradictory evidence on the measures of bank profitability is
not surprising because ROAA accounts for riskiness in loan portfolio
whereas ROAE does not. However, both measures of profitability
show that profitability is not normally distributed as evidenced by the
values of the Jarque–Bera statistic. Besides, the standard deviation of
both measures shows that profitability varies greatly among Nigerian
banks. The results of both Jarque–Bera and the standard deviation
are not unconnected to strata among Nigerian banks. The universal
banks require capitalization of ₦25 billion whereas national and
regional commercial banks require ₦20 billion and ₦15 billion, respec-
tively. This explains the observed differences in profitability. The
finding is validated by the standard deviation of bank size with a value
of $635,062,000 in the industry. Whereas the biggest bank, First
Bank, has total assets of $25,599,582,000, the smallest regional bank,
Wema Bank, has the total assets worth $1,268,476,000. On average,
Nigerian banks have $9,659,709,000 as total assets.
Regarding the nonperforming loans in the industry, Table 3 shows
that the industry has built-up nonperforming loans during the period
of analysis. With an average of 6%, the industry operates within the
CBN stipulated threshold of 10% between 2010 and 2019. Moreover,
Wema Bank recorded the highest nonperforming loans of about 53%
in 2011 whereas the United Bank for Africa (UBA) reports the least
nonperforming loans of 1.2% in 2013. Compared with nonperforming
loan in the industry, the impaired loans report higher values. On
average, Nigerian banks have 7.5% with Unity Bank reporting the
highest level of 48.44% in 2016 whereas Zenith Bank reports the
least-impaired loans of 0.68% in 2014. The standard deviation stands
at 9% implying that impaired loans are highly dispersed among
Nigerian banks. Moreover, ROAA, ROAE, nonperforming, and
impaired loans are leptokurtic relatively to normal distribution
because the kurtosis is higher than 3. On the other hand, capitaliza-
tion and bank size are both leptokurtic and mesokurtic relatively to
normal distribution because they are less than 3. This implies that
capitalization is moderate with medium height whereas bank size has
distributions tails close to the mean.
Furthermore, the study examines the presence of multicollinearity
in the model. Table 4 presents the empirical result. Aside from the
pairs of ROAA and ROAE and the SIZE and CAP which reports the
coefficients of 0.76 and 0.64, respectively, all other pairs are within
the acceptable limits of 0.5. While the coefficient between ROAA and
ROAE does not call for concern because they are used interchange-
ably in the model, the high relationship between capitalization and
bank size is addressed by adopting GMM which addresses endo-
geneity and simultaneity inherent in panel modeling. Because existing
works adopt both variables simultaneously, the linear model common
in the literature may not be adequate.
To examine the appropriateness of technique, we investigate the
stationarity properties of the variables using in panel modeling
(Chang, Huang, & Yang, 2011; Chen, Lee, Chiu, 2014). This objective

TABLE 3 Descriptive statistics of the variables

ROAA ROAE NPL IMP SIZE ($'000) CAP ($'000)

Mean 1.4353 8.1092 6.1354 7.5176 9,659,709. 1,342,599.
Median 1.3400 9.0400 4.9800 3.8900 9,786,446. 1,252,000.
Maximum 5.2700 33.9800 52.9700 48.4400 25,599,582 3,281,256.
Minimum −7.8300 −133.5900 0.6800 1.200 1,268,476. 8233.000
SD 1.9648 22.3502 6.1589 8.9937 6,350,620. 884,524.1
Skewness −1.5753 −3.9214 5.4915 2.5377 0.490380 0.461956
Kurtosis 9.3842 22.8606 41.5673 9.8230 2.329049 2.318296
Jarque–Bera 175.2821 1576.8350 5561.1990 250.0795 4.883392 4.559244
Probability 0.0000 0.0000 0.0000 0.0000 0.087013 0.102323
BOLARINWA ET AL. 655

TABLE 4 Correlation matrix of the variables

ROAA ROAE NPL IMP SIZE CAP

ROAA 1
ROAE 0.7641 1
NPL −0.3298 −0.5174 1
IMP −0.3312 −0.2158 0.0757 1
TOT 0.4236 0.4019 −0.3027 −0.2580 1
CAP 0.4982 0.4347 −0.3441 −0.2256 0.6438 1

TABLE 5 Results of the unit root tests of the variables (individual effects only)

Variables LLC IPS ADF–Fisher PP–Fisher

ROAA −122.800*** −23.5958*** 113.3910*** 131.3690***
ROAE −398.9710 ***
−62.2910 ***
118.6720 ***
138.1810***
NPL −2.2309** −0.0642 29.4847 29.4847**
IMP −6.9560 ***
−1.8843 **
38.8224 **
35.0548**
CAP −20.3802*** −5.0152*** 58.4073*** 48.7291***
SIZE −6.3431 ***
−1.7852 **
34.8241 **
21.3810
ΔNPL −8.1367*** −2.4748*** 52.8708*** 62.3908***
ΔSIZE −5.4046 ***
−1.4295 *
31.2098 *
39.0348*

Note: Δ indicates first difference.

*
10% level of significance.
**
5% level of significance.
***
1% level of significance.

TABLE 6 Results of the unit root test of the variables (individual effects and linear trends)

Variables LLC Breitung IPS ADF–Fisher PP–Fisher

ROAA −61.9395 **
−0.9902 −3.3280 **
44.7231 *
137.4980*
ROAE −26.7686** −1.92189* −4.4134** 101.6870** 160.3040**
NPL −7.4601 **
3.2865 −0.05475 30.8581 61.8350**
IMP −6.5464** −1.2167 −0.1692 27.2634 56.5079**
CAP −6.5052 **
−1.2737 −0.1220 22.0822 47.1277
SIZE −119.355** −1.8E-15 0.1592 17.0568 35.6953
ΔROAA −19.7200** −1.1032 −2.4739** 75.0368** 143.3100**
ΔNPL −13.1522** 1.7900 −0.5860 41.8599* 75.7635*
ΔIMP −7.7421 **
2.5166 −0.2132 30.7169 51.9897**
ΔCAP −9.7218** −2.9827** −0.3093 26.3887 45.8053**
ΔTOT −4.6459 **
0.4699 0.6605 13.8854 22.2325

Note: Δ indicates first difference.

*
5% level of significance.
**
1% level of significance.

is achieved by employing five different tests for robustness. The
empirical results are presented in Tables 5 and 6, respectively. Besides,
whereas Table 5 adopts individual effects only, Table 6 presents
results for the individual effects and linear trends. Whereas LLC
(Levin, Lin, & Chu, 2002) and Breitung (2002) (Breitung's t-statistic)
assume common unit root processes among cross-sectional units, IPS
(Im, Pesaran, & Shin, 2003), the augmented Dickey–Fuller (ADF), and
Phillips–Perron (PP)–Fisher chi-square (Maddala & Wu, 1999) assume
individual unit root processes across cross-sectional units. In running
these tests, the Akaike information criterion (AIC) is used for selecting
appropriate lags. The results using the individual effects only show
that ROAA, ROAE, impaired loans, and capitalization are all stationary
at levels, that is, I(0) under all tests. Similarly, three tests confirm that
bank size is stationary at levels while the nonperforming loan is
stationary at first differencing, that is, I(1). Thus, the individual effect
only shows that the variables are a mixture of I(0) and I(1) variables.
Regarding the individual effect with linear trend model, the
results show that both measures of profitability are stationary at
656 BOLARINWA ET AL.

levels while nonperforming loans, impaired loans, bank size, and
capitalization are all stationary at the first difference at the conven-
tional level of significance. Because the stationarity properties of the
variables in the model are a mixture of levels and the first difference,
the common panel cointegration method is not tenable. Besides,
because the order of stationarity is not above the first difference, the
dynamic GMM is appropriate and adopted.
Lastly, the study examines the threshold effect in the
nonperforming loans–profitability nexus. Table 7 presents the results
for our main measure, nonperforming loans whereas Table 8 presents
the results for the alternative measure, impaired loans. Following the
Nigerian accounting standard and the CBN prudential guidelines
(2019), a loan is nonperforming if interest or principal is past due for
more than 90 days. Nonperforming loans are further classified into
three: substandard, doubtful, and lost credit facilities. It is substandard
if either the principal or interest is past due 91 days but less than
180 days. It is doubtful if more than 180 days but less than 360.
Lastly, it is a lost credit if more than 360 days. The paper provides
separate estimations for two renowned measures of profitability in
the literature, ROAA and ROAE. It should be noted that while ROAA
accounts for the riskiness of loan portfolio, ROAE does not (Bolarinwa
et al., 2019; Dietrich & Wanzenried, 2014). Moreover, for measures
of profitability, two models are estimated. The first adopts bank size
and nonperforming loans while the other introduces capitalization.
The first adopts bank size and nonperforming loans while the other
introduces capitalization to capture the capitalization policy in the
banking industry. In recent literature, it is argued that the highly
capitalized banking industry experiences low nonperforming loans and
relative stability. Following this view, several banking industries have
introduced recapitalization policy. The Nigerian banking follows this
direction. The industry adopted recapitalization policy, thus increasing
the capital base of banks from ₦2 billion to ₦25 billion in 2005. The
second round was implemented in 2011. The work captures this
policy intervention in the modeling.
The results are presented in the following format. In each
measure of loans, the first two columns present the results for the
individual measure of profitability whereas capitalization is introduced
into the second model. Lastly, the first two rows in each model

TABLE 7 Threshold model of the effect of nonperforming loans on bank profitability in the Nigerian banking industry

Variables ROAA ROAA ROAE ROAE

Lower regime
Lag of ROAA/ROAE −0.6789* (0.3537) −0.5141* (0.2677) −0.3737 (0.5897) −0.3802 (2.2681)
Bank size 0.0336 (0.9657) 11.7262*** (4.3351) 19.4566*** (5.8183) −8.1364 (42.5735)
Nonperf. loans −1.4673 (0.8649)
* *
0.1088 (0.0642) 2.1094 (1.4617) −5.2220*** (1.5647)
Capitalization −6.6192 (3.0693)
**
−16.2367 (15.3469)
Constant −23.3543 ***
(8.1307) 91.3583 ***
(33.4835) 394.3982 (282.9497) 1202.628*** (293.6033)
Upper regime
Lag of ROAA/ROAE 0.1809 (0.2786) 0.0624 (0.2901) −0.1067 (0.5786) −0.3867 (2.7882)
Bank size 1.4988*** (0.3932) −12.5831*** (2.3178) −28.7968 (19.3815) 134.7453*** (28.3844)
Nonperf. loans 1.0069 (0.9187) −1.4758** (0.2044) −3.8760* (2.0395) 0.0515* (2.9629)
***
Capitalization 7.8429 (1.5846) 65.6329*** (11.9625)
Overall
Lag of ROAA/ROAE −0.2511*** (0.0903) 0.0345 (0.0582) −0.0423 (0.0769)
Bank size −0.4951 (0.2178)
**
−2.0577 ***
(0.6587) 18.2989 ***
(5.5546) 4.0438 (2.8982)
Nonperf. loans −0.2339 (0.1512) −0.9013*** (0.1273) 20.8152*** (7.0596) 7.4404*** (0.7899)
Capitalization −1.3998** (0.6150) 37.4505*** (1.0200)
Post-estimation tests
Kink 0.1828 (0.1755) 1.5175** (0.6113) −24.8799*** (7.0387) −9.0825***
*** *** ***
Threshold indicator 4.97% 3.51% 3.15% 5.06%***
CI 2.77–7.17% 2.60–4.42% 2.73–3.57% 4.63–5.49%
AR(1) −1.2487 (0.2118) −1.3320 (0.1829) −1.3187 (0.1873) −1.1114 (0.2664)
AR(2) 1.1299 (0.2585) 1.1983 (0.2308) 1.1796 (0.2382) 1.9868 (0.0569)
Sargan test (Prob.) 10.9421 (0.4481) 10.0855 (0.5227) 10.5127 (0.4849) 11.1870 (0.4277)
Linearity test (Prob.) 0.0000*** 0.0000*** 0.0000*** 0.0000***
No. of banks 14 14 14 14

Note: Dependent: ROAA and ROAE. Standard errors are indicated in the brackets.
*
10% level of significance.
**
5% level of significance.
***
1% level of significance.
BOLARINWA ET AL. 657

TABLE 8 Threshold model of the effect of impaired loans on bank profitability in the Nigerian banking industry

Variables ROAA ROAA ROAE ROAE

Lower regime
Lag of ROAA/ROAE 0.0959 (2.2984) −0.0702 (0.4866) −0.0464 (0.2311) −0.0690 (0.1263)
Bank size −5.5995 (3.0359)
*
−1.3594 (10.4579)
* **
30.5241 (14.8600) 322.957* (188.1189)
Impaired loans −4.3494* (2.3029) −0.8410* (1.5446) −15.6804 (13.7158) 14.1012* (21.0062)
Capitalization −0.7016 (7.8968)
*
−285.6009* (162.2771)
Constant −83.3968 (70.2631) 20.5500 (46.5754) 40.8213 (137.0816) 1147.5940 (782.9935)
Upper regime
Lag of ROAA/ROAE −0.2413 (2.5770) 0.4972 (0.4099) 0.6428* (0.3541) 0.5626 (0.6571)
Bank size 4.4663 (4.5379) −14.7321 (6.3783)
**
−5.1508 (10.9763) −335.3008* (181.8269)
Impaired loans 4.3054* (2.3525) 0.8158* (1.5760) 14.5582 (14.6855) −13.4032 (21.0199)
***
Capitalization 14.5531 (4.9044) 304.102* (155.8013)
Overall
Lag of ROAA/ROAE −0.0650 (0.0655) −0.2543*** (0.0233) 0.1231*** (0.0111) 0.0453 (0.0416)
Bank size −0.4839 (0.6447) −0.9822 (1.9540) 1.5315 (8.8422) −86.4567** (34.5255)
Impaired loans −0.2637 ***
(0.0929) *
0.3725 (0.2184) −5.9525 ***
(1.8985) 52.2118* (28.2146)
Capitalization 1.2524 (1.1186) 6.3381 (4.4640)
Post-estimation tests
Kink 0.2120*** (0.0792) −0.3950* (0.2225) 5.4672*** (1.8201) −6.3381 (4.4640)
*** ***
Threshold indicator 9.55 5.15% 2.52%*** 2.81%***
Confidence Int. (CI) 6.65–12.44% 1.55–5.75% 2.07–2.96% 1.05–4.56%
AR(1) −1.0917 (0.2750) −1.0974 (0.2725) −1.1696 (0.2422) −1.2932 (0.1959)
AR(2) −1.2183 (0.2231) −1.5820 (0.1137) 1.1150 (0.2653) 1.0942 (0.2739)
Sargan test (Prob.) 7.0334 (0.7964) 6.9064 (0.8066) 10.0754 (0.5236) 9.4460 (0.3972)
Linearity test (Prob.) 0.0000*** 0.0000*** 0.0000*** 0.0000***
No. of Banks 12 12 12 12

Note: Dependent: ROAA and ROAE. Standard errors are indicated in the brackets.
*
10% level of significance.
**
5% level of significance.
***
1% level of significance.

present disaggregated results based on transition variable of bank
size. Thus, the lower regime captures the less capitalized banks
whereas the upper regime reports result for more capitalized banks.
Lastly, the overall model presents the aggregate model. The estimated
results show stable coefficients. The Sargan test of autocorrelation
shows that the instruments adopted are not correlated with the error
term. Hence, the instruments are appropriate and valid. The robust-
ness of the models is checked using the Arellano–Bond's auto-
regressive tests. In all models, there is no evidence of overidentifying
restrictions. All results show that AR(1) and AR(2) autocorrelations are
not present in the models. Because the probability values are higher
than 0.5, the empirical results are therefore robust and unbiased.
Moreover, for all models, the study rejects the null hypothesis of no
threshold because the threshold indicator is statistically significant at
1%. This implies that there is a threshold relationship in the nexus.
Thus, there is a threshold level of nonperforming loans for achieving
optimal profitability without stability trade-off in the Nigerian banking
industry. Furthermore, the threshold relationship is validated by the
linearity test. The test is based on the bootstrap algorithm robust to
the nonparametric iid under the null hypothesis of no threshold. The
results of the linearity test confirm that the models are not linear
because the indicators are significant at 1%. Considering the smallness
of the sample size of the models adopted, the study adopts a 10%
level of significance in reporting the empirical results throughout the
study. Moreover, the significance of the lagged of profitability in most
of the models confirm the dynamism of profitability in the literature
(Bolarinwa et al., 2019; Dietrich & Wanzenried, 2014; Yanikkaya,
Gumus, & Pabuccu, 2018). This implies that the Nigerian banking
industry is competitive and exercises speedy adjustment because the
estimated coefficients range between −0.51 and −0.67 and 0.37 and
0.38 for ROAA and ROAE, respectively.
In the nonperforming loans model, the model without capitaliza-
tion, the study finds a threshold level of 4.97% for nonperforming loans
comprising the substandard, doubtful, and lost credit facilities. This,
however, reduced to 3.5% with the introduction of capitalization. The
results imply that 4.97% is the appropriate threshold level of nonper-
forming loans without the capitalization policy. However, the recent
recapitalization of the CBN requires the threshold level of 3.5% to
658
ensure optimal profitability without stability trade-off in the industry.
Thus, recapitalization has tremendously reduced the threshold level of
nonperforming loans in the Nigerian banking industry. The results also
support the recent reduction of the maximum threshold from 10% to
5% in the industry. The paper argues that the 5% introduced in 2019 is
still higher considering the necessary threshold of 3.5% suggested by
the results. This justifies the argument of the CBN that 5% level of non-
performing loans is adequate for addressing the high level of nonper-
forming loans in the banks' loan portfolio. Thus, bank managers should
adopt the threshold in their loan portfolio and lending to the real sector.
Besides, this brings about stability and optimum profitability among
banks with fragility trade-off. Bank managers should therefore adjust
their loans portfolio to accommodate this policy. On the other hand,
the paper finds contradictory evidence for the ROAE models. The intro-
duction of recapitalization policy into the industry increase the required
threshold level from 3.15% to 5.1%. The contradictory evidence may
not be unconnected with diverse views of profitability. Whereas ROAA
incorporates risk into the model, ROAE pays attention to shareholders'
benefits. Hence, ROAA fits more into risk analysis, and the estimated
threshold is thus risk adjusted in this sense.
The results further show that in both aggregate models, bank size
exercises a significant negative effect on profitability. For the less
capitalized banks, size increases profitability whereas the opposite
results are reported for the highly capitalized banks. This implies that
better-capitalized banks are reaping economies of scale in forms of
operational efficiency gains and rents accrued to firms from enhanced
an, 2013; Vijayakumar
bargaining power (Bolarinwa et al., 2019; Dog
& Tamizhselvan, 2010). On the other hand, the study shows a nega-
tive relationship between bank size and profitability. Thus, the biggest
banks in the industry are experiencing diseconomies of scale in forms
of bureaucracy, inertia, and other issues associated with big organiza-
tions (Olaniyi et al., 2017). The study also finds a negative effect of
capitalization on the profitability on smaller banks and positive impact
on large banks. This implies that the recapitalization policy increased
the profitability of the biggest banks in the industry compared with
the smaller banks. This agrees with the fact that the capital base of
the universal banks in Nigeria increased from ₦50 billion compared
with national and regional banks that marginally increased to ₦25 bil-
lion and ₦10 billion, respectively. Thus, it is established that a lower
capital base reduces the profitability of Nigerian banks whereas a high
capital base increases profitability. This is because high capital base
allows highly capitalized banks to retain significant market share and
thus higher profitability. The result supports the literature
(Radivojevic & Jovovic, 2017; Rosenkranz & Lee, 2019; Us, 2018).
Furthermore, the paper finds mixed results for the role of nonper-
forming loans in modulating profitability. Although nonperforming
loan has a significant negative effect on the profitability of smaller
banks, it yields a positive effect on the profitability of big banks in the
industry. The reasons are not farfetched. First, the smaller banks are
unable to afford robust executive boards and effective risk manage-
ment framework. The results agree with extant literature (Adeola &
Ikpesu, 2017; Akinlo & Emmanuel, 2014). The empirical results
validate the hazard hypothesis in the Nigerian banking industry which
BOLARINWA ET AL.
postulates that less capitalized banks have high nonperforming loans
in their portfolio compared with bigger banks because of their capital
base. Lastly, the study examines the presence of kinks in the models.
The paper discovers that asides from the thresholds, there are kinks in
the models (Hansen, 2017; Hidalgo, Lee, & Seo, 2019).
The study adopts another renowned measure of profitability,
ROAE. Similar to the ROAA models, the ROAE models show stable
coefficients. First, there is no evidence of overidentifying restriction
and autocorrelation in the models. Regarding the overall model, this
study found a significant effect of bank size on profitability. The
disaggregate models confirmed the results of a positive effect of bank
size on the profitability of smaller banks and a negative impact of bank
size on the profitability of big banks in the upper regime. Thus, both
measures of profitability agree on the role of bank size in big and
smaller banks in the Nigerian banking industry. Similarly, the nonper-
forming loan harms the profitability of banks in the lower regime and
positive effect on the profitability of banks in the upper regime. This,
however, contradicts the finding of the ROAA model. Lastly, capitali-
zation only has a significant positive effect on the profitability of big
banks. Thus, a significant increase in the capitalization of banks as
witnessed by international banks in Nigeria yields a significant effect
on the profitability of banks in Nigeria which agrees with extant stud-
ies (Adeola & Ikpesu, 2017; Akinlo & Emmanuel, 2014). Unlike the
ROAA models, however, the model does not display dynamism. This is
because the lag of the dependent variable is not significant.
To validate the empirical results, this study checks the robustness
using impaired loans. Following a few studies (IMF, 2007; Jakubík &
Reininger, 2013), we prefer impaired to nonperforming loans for its pre-
dictive ability and robustness. The empirical results for impaired loans
are presented in Table 8. Examining the ROAA model, we find that the
empirical results confirm the negative effect of bank size on impaired
loans thus validating hazard hypothesis in the context of the Nigerian
banking industry. Similarly, impaired loans report mixed results for both
capitalization and impaired loans; whereas a negative effect is found for
the smaller banks, a positive effect is reported for the bigger banks. The
results are attributed to inadequacy of capital base of regional and
national banks that probably fall among lower regime. It should be
recalled that these banks have operational licenses of ₦25 billion and
₦10 billion, respectively, compared with international banks with ₦50
billion capital base. The results agree with findings in the literature.
It is also found that the ROAE models are not dynamic. This is not
surprising because the profitability measure is only relevant for
comparing firms without emphasis on the risk associated with the
investments. Bank size exercises a significant effect on profitability in
the ROAE models and a negative impact on the upper regime banks.
This finding validates the existence of economies of scale for the less
capitalized banks in the industry and diseconomies of scale for the
biggest banks. This implies that by increasing size, lower banks can
improve their profitability. On the other hand, the biggest banks in the
industry are already experiencing inertia, bureaucracy, associated with
big organizations, which tend to reduce their profitability in recent
times. The empirical results validate existing studies (Akinlo, 2012;
Olaniyi et al., 2017). Overall, the model found a threshold of 5.2% and
BOLARINWA ET AL.
2.81 for ROAA and ROAE, respectively. Comparatively, the paper docu-
ments a reducing threshold effect of recapitalization policy from 5.0%
to 3.5% and 9.6% to 5.2% in ROAA for nonperforming and impaired
loans, respectively. On the other hand, it found an increasing threshold
effect of recapitalization policy from 3.2% to 5.1% and 2.5% to 2.8%
for ROAA and ROAE, respectively. This implies that recapitalization pol-
icies of 2005 and 2011 in the Nigerian banking industry require a strin-
gent threshold of 3.5% and 5.2% for nonperforming loans and impaired
loans, respectively, for profitability in the industry to sustain stability.
Hence, bank managers should adjust their loan portfolio to accommo-
date this policy for stability and optimal profitability in the industry.
6 | C O N CL U S I O N
This work has examined the threshold effect in the nonperforming
loans–profitability nexus in the Nigerian banking industry. The paper
deviates from extant studies by documenting a nonlinear relationship
in the nexus. We found a threshold of 3.5% and 5.0% for ROAA and
ROAE in the nonperforming loans models, respectively. Contrarily, the
study finds higher threshold levels of 5.2% and 2.8% for ROAA and
ROAE, respectively, in the impaired loans. Overall, our results are
important for policy formulations. First, the CBN is advised to revisit
the threshold of 5% introduced in the Nigerian banking industry in
2019 in the prudential guidelines. The 3.5% threshold level of nonper-
forming loans is recommended for commercial banks operating in the
industry to attain optimal profitability without stability trade-off. Sec-
ond, the paper recommends the adoption of impaired loans asides
from nonperforming loans for policymaking. Although this is broader
and more comprehensive, it has also built up in the industry in recent
times as shown in Figure 2. Following this result, the 5% threshold is
recommended for the industry. The study, therefore, justifies the
CBN 5% threshold level of nonperforming loans in the industry. The
empirical results further advise the bank managers to adjust their loan
portfolio to accommodate the new policy as this would not reduce
the profitability in the industry as earlier argued by bank managers.
Besides, the policy does not tend to reduce credit mobilization of the
commercial banks to the real sector.
RE FE R ENC E S
Abid, L., Ouertani, M. N., & Zouari-Ghorbel, S. (2014). Macroeconomic and
bank-specific determinants of household's non-performing loans in
Tunisia: A dynamic panel data. Procedia Economics and Finance, 13
(December 2013), 58–68. https://doi.org/10.1016/s2212-5671(14)
00430-4
Adelopo, I., Lloydking, R., & Tauringana, V. (2018). Determinants of bank
profitability before, during, and after the financial crisis. International
Journal of Managerial Finance, 14(4), 378–398.
Adeola, O., & Ikpesu, F. (2017). Macroeconomic determinants of non-
performing loans in Nigeria: An empirical analysis. The Journal of
Developing Areas, 51(2), 31–43. https://doi.org/10.1353/jda.2017.
0029
Akinlo, A. E. (2012). Firm size-profitability nexus: Evidence from panel data
for Nigeria. Economic Research—Ekonomska Istraživanja, 25(3),
706–721.
659
Akinlo, O., & Emmanuel, M. (2014). Determinants of non-performing loans
in Nigeria. Accounting & Taxation, 6(2), 21–28.
Alandejani, M., & Asutay, M. (2017). Nonperforming loans in the GCC
banking sectors: Does the Islamic finance matter? Research in Interna-
tional Business and Finance, 42(June), 832–854. https://doi.org/10.
1016/j.ribaf.2017.07.020
Ali, M. Y. (2018). Bank specific determinants of nonperforming loan:
Empirical study in case of state owned commercial banks in
Bangladesh. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.
3116433
Amuakwa-Mensah, F., Marbuah, G., & Ani-Asamoah Marbuah, D. (2017).
Re-examining the determinants of non-performing loans in Ghana's
banking industry: Role of the 2007–2009 financial crisis. Journal of
African Business, 18(3), 357–379. https://doi.org/10.1080/15228916.
2017.1308199
Arpa, M., Giulini, I., Ittner, A., & Pauer, F. (2001). The influence of
macroeconomic developments on Austrian banks: Implications for
banking supervision. BIS Papers, 1, 91–116.
Athanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific,
industry-specific and macroeconomic determinants of bank
profitability. Journal of International Financial Markets Institutions
and Money, 18(2), 121–136. https://doi.org/10.1016/j.intfin.2006.
07.001
Atoi, N. V. (2019). Non-performing loan and its effects on banking stability:
Evidence from national and international licensed banks in Nigeria.
Central Bank of Nigeria Journal of Applied Statistics, 9(2), 43–74.
https://doi.org/10.33429/cjas.09218.3/6
Azad, A. S. M. S., Azmat, S., & Hayat, A. (2020). What determines the
profitability of Islamic banks: Lending or fee? International Review of
Economics and Finance, (August 2018). https://doi.org/10.1016/j.iref.
2019.05.015
Bakoush, M., Abouarab, R., & Wolfe, S. (2019). Disentangling the impact of
securitization on bank profitability. Research in International Business
and Finance, 47, 519–537. https://doi.org/10.1016/j.ribaf.2018.
09.013
Bikker, J. A., & Hu, H. (2002). Cyclical patterns in profits, provisioning and
lending of banks and procyclicality of the new Basel capital require-
ments. Banca Nazionale del Lavaro Quarterly Review, 55, 143–175.
Bolarinwa, S. T., & Adegboye, A. A. (2020). Re-examining the determinants
of capital structure in Nigeria. Journal of Economic and Administrative
Sciences. https://doi.org/10.1108/JEAS-06-2019-0057
Bolarinwa, S. T., Obembe, O. B., & Olaniyi, O. V. (2019). Re-examining the
determinants of bank probility in the Nigerian banking industry.
Journal of Economic Studies, 46(4), 23–43.
Bourke, P. (1988). Concentration and other determinants of bank
profitability in Europe, North America and Australia. Journal of Banking
and Finance, 13(1), 6–79.
Breitung, J. (2002). Nonparametric tests for unit roots and cointegration.
Journal of Econometrics, 108(2), 343–363.
Campmas, A. (2020). How do European banks portray the effect of policy
interest rates and prudential behavior on profitability? Research in
International Business and Finance, 51, 100950. https://doi.org/10.
1016/j.ribaf.2018.09.001
Capraru, B., & Ihnatov, I. (2015). Determinants of bank's profitability in
EU15. Analele Stiintifice Ale Universitatii Al I Cuza Din Iasi - Sectiunea
Stiinte Economice, 62(1), 93–101. https://doi.org/10.1515/aicue-
2015-0007
Castro, V. (2012). Macroeconomic determinants of the credit risk in the
banking system: The case of the GIPSI. Working papers series NIPE
WP 11/2012.
CBN. (2018). Central Bank of Nigeria Code of Corporate Governance for
development finance institutions in Nigeria contents, 2–25. Retrieved
from https://www.cbn.gov.ng/Out/2018/FPRD/DFI.pdf
Chadwick, M. G., & Ozturk, H. (2018). Measuring Financial Systemic Stress
for Turkey: A Search for the Best Composite Indicator, Working
660
Papers 1816, Research and Monetary Policy Department, Central
Bank of the Republic of Turkey.
Chang, H. C., Huang, B. N., & Yang, C. W. (2011). Military expenditure and
economic growth across different groups: A dynamic panel Granger-
causality approach. Economic Modelling, 28(6), 2416–2423.
Chen, P. F., Lee, C. C., & Chiu, Y. B. (2014). The nexus between defense
expenditure and economic growth: New global evidence. Economic
Modelling, 36(1), 474–783.
Chowdhury, M., & Rasid, M. (2015). “The determinants of the profitability
of Islamic banks: a crosssectional study from Asia and Africa”. Interna-
tional Journal of Business and Globalization, 15(3), 375–388.
Civcir, I., & Varoglu, E. (2019). International transmission of monetary and
global commodity price shocks to Turkey. Journal of Policy Modeling, 41
(4), 647–665.
Demirgüç-Kunt, A., & Detragiache, E. (1998). The determinants of banking
crises in developing and developed countries, IMF Staff Paper, Inter-
national Monetary Fund, 45(1).
Dietrich, A., & Wanzenried, G. (2011). Determinants of bank profitability
before and during the crisis: Evidence from Switzerland. Journal of
International Financial Markets Institutions and Money, 21(3), 307–327.
https://doi.org/10.1016/j.intfin.2010.11.002
Dietrich, A., & Wanzenried, G. (2014). The determinants of commercial
banking profitability in low-, middle-, and high-income countries. The
Quarterly Review of Economics and Finance, 46(2), 110–118.
Dimitrios, A., Helen, L., & Mike, T. (2016). Determinants of non-performing
loans: Evidence from Euro-area countries. Finance Research Letters, 18,
116–119. https://doi.org/10.1016/j.frl.2016.04.008
Dogan, M. (2013). Does Firm Size Affect The Firm Profitability?
Evidence from Turkey. Research Journal of Finance and Accounting, 4(4),
53–59.
EL-Maude, J. G., Abdul-Rahman, A., & Ibrahim, M. (2017). Determinants of
non-performing loans in Nigeria's deposit. Archives of Business
Research, 5(1), 74–88.
Fainstein, G., & Novikov, I. (2011). The comparative analysis of credit risk
determinants in the banking sector of the Baltic States. Review of
Economics and Finance, 1, 20–45.
Flamini, V., McDonald, C., & Schumacher, L. (2009). The determinants of
commercial bank profitability in Sub-Saharan Africa, Working Paper
No. WP/09/15, IMF, Washington, DC, 1–29.
Gabriel, O., Victor, I. E., & Innocent, I. O. (2019). Effect of non-performing
loans on the financial performance of commercial banks in Nigeria.
American International Journal of Business and Management Studies, 1
(2), 1–9. https://doi.org/10.46545/aijbms.v1i2.82
Garcia, M. T. M., & Guerreiro, J. P. S. M. (2016). Internal and external
determinants of banks' profitability: The Portuguese case. Journal of
Economic Studies, 43(1), 90–107. https://doi.org/10.1108/JES-09-
2014-0166
Glogowski, A. (2008). Macroeconomic determinants of Polish banks’ loan
losses – Results of a panel data study. National Bank of Poland,
Working paper, no. 53.
González-Hermosillo, B. (1999). Determinants of Ex-Ante Banking System
Distress: A Macro-Micro Empirical Exploration of Some Recent
Episodes, IMF Working Paper 99/33, International Monetary Fund.
Hansen, B. E. (2017). Regression Kink with an Unknown Threshold. Journal
of Business and Economic Statistics, 35(2), 228–240.
Hidalgo, J., Lee, J., & Seo, M. H. (2019). Robust inference for threshold
regression models. Journal of Econometrics, 210(2), 291–309.
Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in hetero-
geneous panels. Journal of Econometrics, 115(1), 53–74.
IMF. (2007). Global financial stability report. Washington, DC: International
Monetary Fund.
Jakubík, P., & Reininger, T. (2013). Determinants of Nonperforming Loans
in Central, Eastern and Southeastern Europe, Focus on European
Economic Integration, Oesterreichische National bank (Austrian
Central Bank), (3), 48–66.
BOLARINWA ET AL.
Jakubík, P., & Reininger, T. (2014). What are the key determinants of
nonperforming loans in CESEE? IES Working Papaer Series, 1–25.
Retrieved from http://ies.fsv.cuni.cz
Jimenez, G., & Saurina, J. (2005). Credit cycles, credit risk, & prudential
regulation. Banco de Espana, Working Paper 5.
John, T. (2018). Effect of non-performing loans on bank performance of
some selected commercial bank in the Nigerian banking sector.
International Journal of New Technology and Research, 4(4), 263089.
Khemraj, T., & Pasha, S. (2016). Determinants of nonperforming loans in
Guyana. Financial Deepening and Post-Crisis Development in Emerging
Markets: Current Perils and Future Dawns, 05(02), 169–187. https://
doi.org/10.1057/978-1-137-52246-7_9
Kjosevski, J., & Petkovski, M. (2017). Non-performing loans in Baltic
States: Determinants and macroeconomic effScts. Baltic Journal of
Economics, 17(1), 25–44. https://doi.org/10.1080/1406099X.2016.
1246234
Kjosevski, J., Petkovski, M., & Naumovska, E. (2019). Bank-specific and
macroeconomic determinants of non-performing loans in the Republic
of Macedonia: Comparative analysis of enterprise and household
NPLs. Economic Research-Ekonomska Istrazivanja, 32(1), 1185–1203.
https://doi.org/10.1080/1331677X.2019.1627894
Klein, N. (2013). Non-performing loans in CESEE: Determinants and
impact on macroeconomic performance. IMF Working Papers, 13(72),
1. https://doi.org/10.5089/9781484318522.001
Kumar, R. R. (2015). Determinants of non-performing loans in small devel-
oping economies: A case of Fiji's banking sector. Accounting Research
Journal, 31(2), 192–213. https://doi.org/10.1002/pds
Kumar, V., & Kishore, M. P. (2019). Macroeconomic and bank specific
determinant of non-performing loans in UAE Conventional Bank.
Journal of Banking and Finance Management, 2(1), 1–12.
Kure, E., Adigun, M., & Okedigba, E. (2017). Non-Performing Loans in
Nigerian Banks: Determinants and Macroeconomic Consequences,
Central Bank of Nigeria. Economic and Financial Review, 55(3), 1–24.
Kuzucu, N., & Kuzucu, S. (2019). What drives non-performing loans?
Evidence from emerging and advanced economies during pre- and
post-global financial crisis. Emerging Markets Finance and Trade, 55(8),
1694–1708. https://doi.org/10.1080/1540496X.2018.1547877
Laidroo, L., & Männasoo, K. (2014). Perils of excessive credit growth:
Evidence from 11 new EU member states. Baltic Journal of Economics,
14(1-2), 17–34.
Laila, M. (2017). Macroeconomic and bank specific determinants of non-
performing loans (Npls) in the indian banking sector. Studies in Business
and Economics, 12(2), 125–135.
Le, T. D., Tzeremes, P. G., & Ngo, T. (2020). Bank efficiency in Vietnam: Do
scale expansion strategies and non-performing loans matter? Interna-
tional Journal of Finance & Economics, 1–22. https://doi.org/10.1016/j.
cbrev.2020.04.001
Levin, A., Lin, C. F., & Chu, C. (2002). Unit root tests in panel data:
Asymptotic and finite sample properties. Journal of Econometrics, 108
(1), 1–24.
Louzis, D. P., Vouldis, A. T., & Metaxas, V. L. (2012). Macroeconomic and
bank-specific determinants of non-performing loans in Greece: A
comparative study of mortgage, business and consumer loan portfo-
lios. Journal of Banking and Finance, 36(4), 1012–1027. https://doi.org/
10.1016/j.jbankfin.2011.10.012
Maddala, G. S., & Wu, S. (1999). A comparative study of unit root tests
with panel data and a new simple test. Oxford Bulletin of Economics
and Statistics, 61(S1), 631–652.
Manz, F. (2019). Determinants of non-performing loans: What do we
know? A systematic review and avenues for future research.
Management Review Quarterly, 69, 351–389 Springer International
Publishing. https://doi.org/10.1007/s11301-019-00156-7
Martins, A. M., Serra, A. P., & Stevenson, S. (2019). Determinants of real
estate bank profitability. Research in International Business and Finance,
49, 282–300. Elsevier.
BOLARINWA ET AL.
Mazreku, I., Morina, F., Misiri, V., Spiteri, J. V., & Grima, S. (2018). Determi-
nants of the level of non-performing loans in commercial banks of
transition countries. European Research Studies Journal, 21(3), 3–13.
https://doi.org/10.35808/ersj/1040
Meeker, L. G., & Gray, L. (1987). A note on non-performing loans as an
indicator of asset quality. Journal of Banking & Finance, 11(1),
161–168.
Nkusu, M. (2011). Nonperforming Loans and Macrofinancial Vulnerabil-
ities in Advanced Economies, IMF Working Papers 11/161, Interna-
tional Monetary Fund.
Ojo, J. A. T., & Somoye, R. O. C. (2014). The impact of commercial banks
non–performing loans on financial development in Nigeria, 1–24.
Olaniyi, O. O., Simon-Oke, O. O., Obembe, O. B., & Bolorinwa, S. T. (2017).
Re-examining Firm Size-profitability Nexus: Empirical Evidence from
Non-financial Listed Firms in Nigeria. Global Business Review, 18(3),
543–558.
Ouhibi, S., Ezzeddine, S., & Hammami, A. (2017). Non-performing loans
and systemic risk: Empirical evidence to Tunisia and Morocco. Arabian
Journal of Business and Management Review, 7(2), 1–7. https://doi.org/
10.4172/2223-5833.1000296
Pain, D. (2003). The provisioning experience of the major UK banks: A
small panel 70. Investigation. Working paper, 177.
Panta, B. (2018). Non-performing loans and bank profitability: Study of
joint venture banks in Nepal. International Journal of Sciences: Basic and
Applied Research (IJSBAR), 42(1), 151–165.
Patwary, M. S. H., & Tasneem, N. (2019). Impact of Non-Performing Loan
on Profitability of Banks in Bangladesh: A Study from 1997 to 2017.
Global Journals, 19(1C), 1–10.
Pessarossi, P., Thevenon, J., & Weill, L. (2020). Does high profitability
improve stability for European banks? Research in International
Business and Finance, 53(C), 1–20.
Pestova, A., & Mamonov, M. (2012). Macroeconomic and bank-specific
determinants of credit risk: Evidence from Russia. EERC Working
Paper Series 13/10e, EERC Research Network, Russia and CIS.
Petria, N., Capraru, B., & Ihnatov, I. (2015). Determinants of banks' profit-
ability: Evidence from EU 27 banking systems. Procedia Economics and
Finance, 20(15), 518–524. https://doi.org/10.1016/s2212-5671(15)
00104-5
Radivojevic, N., & Jovovic, J. (2017). Examining of determinants of non-
performing loans. Prague Economic Papers, 26(3), 300–316. https://doi.
org/10.18267/j.pep.615
Rajha, K. S. (2017). Determinants of non-performing loans: Evidence from
the Jordanian banking sector. Journal of Finance and Bank Management,
4(1), 125–136. https://doi.org/10.15640/jfbm.v5n1a5
Reinhart, C. M., & Rogoff, K. S. (2011). From Financial Crash to Debt Crisis.
American Economic Review, 101(5), 1676–1706.
Rosenkranz, P., & Lee, J. (2019). Nonperforming Loans in Asia: Determi-
nants and Macrofinancial Linkages, ADB Economics Working Paper
Series 574, Asian Development Bank. https://doi.org/10.2139/ssrn.
3357289
Rottke, N. B., & Gentgen, J. (2008). Workout management of
non-performing loans: A formal model based on transaction cost
economics. Journal of Property Investment & Finance, Emerald Group
Publishing, 26(1), 59–79.
Sala, V., & Saurina, J. (2002). Credit Risk in Two Institutional Regimes:
Spanish Commercial and Savings Banks. Journal of Financial Services
Research, 22(3), 203–224.
Salike, N., & Ao, B. (2017). Determinants of bank’s profitability: role of
poor asset quality in Asia. China Finance Review International, 8(2),
216–231.
661
Seo, M., & Shin, Y. (2016). Dynamic panels with threshold effect and endo-
geneity. Journal of Econometrics, 195, 169–186. https://doi.org/10.
1016/j.jeconom.2016.03.005
Seo, M., Kim, S., & Kim, Y. (2019). Estimation of dynamic panel threshold
model using Stata. The Stata Journal, 19(3), 685–697. https://doi.org/
10.1177/1536867X19874243
Shingjergji, A. (2013). The impact of bank specific variables on the non-
performing loans ratio in the Albanian banking system. Research
Journal of Finance and Accounting, 7, 148–152.
Short, B. (1979). The relation between commercial bank profit rates and
banking concentration in Canada, Western Europe and Japan. Journal
of Banking and Finance, 3(3), 209–219.
Sufian, F., (2012). Determinants of bank profitability in developing econo-
mies: empirical evidence from the South Asian banking sectors. Con-
temporary South Asia, 20(3), 12–32.
Trenca, I., & Benyovszki, A. (2008). Credit risk, a macroeconomic model
application for Romania. Finance and Challenges of the Future, 7,
118–126.
Ugoani, J. N. N. (2016). Nonperforming loans portfolio and its effect on
bank profitability in Nigeria. Independent Journal of Management &
Production, 7(2), 303–319. https://doi.org/10.14807/ijmp.v7i2.406
Ünvan, Y. A., & Yakubu, I. N. (2020). Do bank-specific factors drive bank
deposits in Ghana? Journal of Computational and Applied Mathematics,
376, 112827. https://doi.org/10.1016/j.cam.2020.112827
Us, V. (2018). The determinants of nonperforming loans before and after
the crisis: Challenges and policy implications for Turkish banks.
Emerging Markets Finance and Trade, 54(7), 1608–1622. https://doi.
org/10.1080/1540496X.2017.1315334
Vera-Gilces, P., Camino-Mogro, S., Ordeñana-Rodríguez, X., & Cornejo-
Marcos, G. (2020). A look inside banking profitability: Evidence from a
dollarized emerging country. The Quarterly Review of Economics and
Finance, 75, 147–166. https://doi.org/10.1016/j.qref.2019.05.002
Vijayakumar, A., & Tamizhselvan, P. (2010). Corporate size and
profitability: An empirical analysis. College Sadhana – Journal for
Bloomers of Research, 3(1), 44–53.
Virolainen, K. (2004). Macro stress testing with a macroeconomic credit
risk model for Finland, Bank of Finland. Discussion Papers, 18, 1–45.
Yang, C. C. (2017). Reduction of non-performing loans in the banking
industry: An application of data envelopment analysis. Journal of
Business Economics and Management, 18(5), 833–851. https://doi.org/
10.3846/16111699.2017.1358209
Yanikkaya, H., Gumus, N., & Pabuccu, Y. U. (2018). How profitability dif-
fers between conventional and Islamic banks: A dynamic panel data
approach. Pacific Basin Finance Journal, 48(1), 99–111.
Yurttadur, M., Celiktas, E., & Celiktas, E. (2019). The place of non-
performing loans in the Turkish banking sector. Procedia Computer
Science, 158, 766–771. https://doi.org/10.1016/j.procs.2019.09.113
How to cite this article: Bolarinwa ST, Olayeni RO, Vo XV. Is
there a nonlinear relationship between nonperforming loans
and bank profitability? Evidence from dynamic panel
threshold. Manage Decis Econ. 2021;42:649–661. https://doi.
org/10.1002/mde.3262