THE RELATIONSHIP BETWEEN LOAN LOSS PROVISION AND NON- PERFORMING LOANS. A STUDY OF UNITED BANK FOR AFRICA, PLC
Abstract
This study investigates the relationship between loan loss provisions and non-performing loans at the United Bank for Africa (UBA), focusing on the period from 2010 to 2020. The primary objectives were to examine the methods used by banks to estimate loan loss provisions in UBA, and to assess the impact of non-performing loans on the financial performance of UBA banks. Hypotheses tested; whether there is no significant relationship between non-performing loans and loan loss provisions in UBA Nigerian banks; there is no significant impact in the methods used by banks to estimate loan loss provisions in UBA. Using data from UBA's annual reports, a quantitative analysis was conducted to determine the correlation between loan loss provisions and non-performing loans. The Pearson correlation coefficient was calculated, and hypothesis testing was performed to assess the significance of the relationships. The results indicate a moderate positive relationship between non-performing loans and loan loss provisions, suggesting that as non-performing loans increase, so do the loan loss provisions. This finding is consistent with the expectation that banks set aside more funds to cover potential losses from defaulted loans. However, hypothesis testing revealed that the impact of the methods used by banks to estimate loan loss provisions in UBA was not statistically significant. The study concludes that there is a moderate positive correlation between non-performing loans and loan loss provisions in UBA, indicating that the increase in non-performing loans leads to an increase in loan loss provisions. However, the methods used by UBA to estimate loan loss provisions do not have a significant impact, suggesting that the current estimation methods may need to be reevaluated or improved to better reflect the risks associated with non-performing loans. Based on the findings the following were recommended: Enhance Loan Loss Provisioning Methods; Strengthen Risk Management Practices; Regular Review and Adjustment; Training and Development; Leverage Technology.
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