MODERATING ROLE OF LOAN LOSS PROVISION ON THE RELATIONSHIP BETWEEN CAPITAL ADEQUACY RISK AND THE PEFORMANCE OF COMMERCIAL BANKS IN NIGERIA

Abstract

The review of literatures enable the study to identify in consistency results of risk factors
affecting financial performance of banks. This motivated the researcher to introduce a
moderating factor. Thus, the basic objective of this study is to examine the moderating role of
loan loss provision on the relationship between capital adequacy risk and performance of
Commercial Banks in Nigeria for period ranging from 2007 to 2018. The population of the study
is fifteen (15) listed commercial banks in the Nigerian Stock Exchange as at 31st December
2018. The research used two data filtering techniques to sample twelve (12) listed commercial
banks in the Nigerian Stock Exchange. The independent variable is capital adequacy risk while
the moderator is Loan Loss Provision (LLP). The dependent variable is performance measured
by profitability using accounting ratio of ROE. Prior to the moderation, the regression outcomes
show that the capital adequacy risk and loan loss provision have negative and significant effect
on ROE. After the moderation, the regression result indicates that the moderator has positive
and significant effect on ROE. In conclusion, loan loss provision significantly moderates the
relationship between capital adequacy risk and performance of commercial banks in Nigeria.
The research recommends among others that the bank managers should use loan loss provision
to manage capital adequacy risk. This is because changes in capital requirement of banks by
regulatory bodies like CBN pose a threat to financial performance of commercial banks in
Nigeria.