Effect of Nonperforming Financing and Capital Adequacy on Financial Performance of Non-Interest Deposit Money Banks in Nigeria

Banking sector is an essential driver for macroeconomic stability, as it facilitates efficient capital allocation and financial intermediation. However, the ongoing rise of Nonperforming Financing (NPF) and unstable capital structures continue to undermine asset quality and reduce the profitability of non-interest deposit money banks (DMBs) in Nigeria, despite several regulatory efforts. This study investigated the effect of Nonperforming Financing and Capital Adequacy on the Financial Performance of Non-interest DMBs in Nigeria. Specifically, this study examined the effect of Nonperforming Financing on the Financial Performance; the direct effect of Capital Adequacy on Financial Performance and the combined effect of Nonperforming and Capital Adequacy on Financial Performance of Non-interest DMBs in Nigeria.
The study was anchored in Agency Theory and adopted an ex-post facto research design. The target population included all four (4) National non-interest Deposit Money Banks. A sampled size of two (02) banks was selected using a purposive sampling technique. Secondary data were extracted from the annual reports of the sampled firms spanning a six-year period from 2020 to 2025. The collected data were then analysed using descriptive statistics and multiple regression analysis.
The results of Nonperforming Financing (NPF) and Financial Performance showed (Coefficient = 0.005, p-value = 0.930), indicating that Nonperforming Financing has positive but not significant effect on financial performance of Non-interest DMBs in Nigeria. Also, the results of Capital Adequacy and Financial Performance showed (Coefficient = -0.082, p-value = 0.047) implying that Capital Adequacy demonstrated a significant negative effect on financial performance of Non-interest Deposit Money Banks in Nigeria. Again, the results of Nonperforming Financing, Capital Adequacy and Financial Performance showed (F-Statistics = 16.695, p-value = 0.004, R2 = 0.952), proved that Nonperforming Financing and Capital Adequacy jointly have positive significant impact on Financial Performance of Non-interest DMBs in Nigeria.
The study concluded that high risk financing contract generate adequate profit to cover Nonperforming Financing of Nigeria’s Islamic banks; Non-interest Banks of Nigeria are maintaining steep idle capital reserves and high Capital Adequacy provide protection and confidence of Non-interest banks engaged in high risk financing contract. This study recommended that Non-interest Islamic banks should maintain stringent financing screening frameworks regardless of current insignificant impact. Also the Banks should shift dormant capital into productive high yield performing financing portfolios and banks align the maturities of their capital funds with their financing assets to maintain optimal liquidity.

Ijara, Interest, Murabaha, Musharaka, Return on Asset

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