Accounting Conservatism, Credit Risk, and Loan Performance in Nigerian Commercial Banks

This study examines the relationships among accounting conservatism, credit risk recognition timeliness, and loan performance outcomes in Nigerian commercial banks. Accounting conservatism, characterized by the asymmetric timeliness of loss recognition relative to gain recognition, is theorized to improve credit risk management by prompting earlier recognition of deteriorating loan quality. In Nigeria's banking sector, where non-performing loans have historically been a significant challenge, understanding the role of conservative accounting in credit discipline is practically important. This study uses panel data from 10 listed commercial banks for the period 2015 to 2023. Accounting conservatism is measured using Basu's asymmetric timeliness model and the accrual-based conservatism measure of Ball and Shivakumar. Credit risk is proxied by the non-performing loan ratio and loan loss provision adequacy. Loan performance is measured using net interest margin and return on loans. Fixed effects panel regression and two-stage least squares estimation are applied. Results indicate that higher accounting conservatism is significantly and negatively associated with the non-performing loan ratio, suggesting that conservative banks recognize credit deterioration earlier and provision more adequately. Conservative accounting is also associated with marginally lower net interest margins in the short run, reflecting more cautious loan pricing. The study concludes that conservative accounting practices improve credit risk management effectiveness in Nigerian banks. It recommends that the CBN incorporate accounting conservatism metrics into its supervisory assessment framework for bank financial reporting quality.

Keywords: accounting conservatism, credit risk, non-performing loans, Nigerian banks, loan performance.