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Effect of Debt Recovery on the Financial Performance of Deposit Money Banks in Nigeria

Abstract

Debt recovery has become a critical aspect of credit risk management in the banking industry due to its significant influence on asset quality, liquidity, profitability, and overall financial stability. Debt recovery refers to the processes and strategies employed by financial institutions to recover overdue loans and non-performing credit facilities from borrowers through negotiation, restructuring, loan refinancing, legal actions, collateral realization, asset recovery, and other recovery mechanisms. Deposit Money Banks (DMBs) play a vital role in financial intermediation by mobilizing deposits and extending credit to individuals, businesses, and government institutions. However, increasing levels of non-performing loans (NPLs), loan defaults, economic instability, exchange rate volatility, inflationary pressures, and weak borrower repayment capacity continue to pose significant challenges to the Nigerian banking sector. Ineffective debt recovery practices may result in increased loan losses, reduced profitability, liquidity constraints, deterioration in asset quality, and weakened investor confidence. In response, the Central Bank of Nigeria (CBN), the Nigeria Deposit Insurance Corporation (NDIC), and other regulatory institutions have strengthened prudential guidelines, credit risk management frameworks, and loan recovery regulations to improve the resilience and financial soundness of Deposit Money Banks. Effective debt recovery is expected to improve loan portfolio quality, reduce credit losses, strengthen cash flows, and enhance financial performance. Although previous studies have examined credit risk management and non-performing loans, empirical evidence regarding the effect of debt recovery on the financial performance of Deposit Money Banks in Nigeria remains limited and inconclusive. Against this background, this study investigates the effect of debt recovery on the financial performance of Deposit Money Banks in Nigeria. The study is anchored on Credit Risk Theory, Agency Theory, and the Resource-Based View (RBV). Credit Risk Theory posits that effective credit monitoring and debt recovery mechanisms minimize credit losses and improve the financial stability and profitability of lending institutions. Agency Theory explains that effective debt recovery policies strengthen accountability and reduce agency conflicts by ensuring prudent management of depositors' funds and shareholders' investments. The Resource-Based View argues that effective debt recovery capabilities constitute valuable organizational resources that enhance operational efficiency, competitive advantage, and long-term financial performance. Collectively, these theoretical perspectives provide a comprehensive framework for explaining the relationship between debt recovery and the financial performance of Deposit Money Banks in Nigeria. The study adopts a quantitative research design using a structured questionnaire administered to credit managers, recovery officers, risk managers, loan officers, branch managers, internal auditors, finance managers, compliance officers, and other personnel responsible for credit administration and debt recovery within selected Deposit Money Banks in Nigeria. A stratified random sampling technique will be employed to ensure adequate representation of respondents from both international and national Deposit Money Banks. Debt recovery will be measured using loan recovery efficiency, recovery procedures, debt restructuring practices, collateral realization, recovery period, legal enforcement mechanisms, and non-performing loan management, while financial performance will be measured using Return on Assets (ROA), Return on Equity (ROE), profitability, liquidity, operational efficiency, earnings growth, and asset quality. Primary data collected from respondents will be analyzed using descriptive statistics to summarize respondents' demographic characteristics and perceptions regarding debt recovery and financial performance. Structural Equation Modeling (SEM) will be employed to examine the effect of debt recovery on financial performance. The measurement model will be evaluated using Cronbach's Alpha, Composite Reliability (CR), Average Variance Extracted (AVE), and Confirmatory Factor Analysis (CFA) to establish the reliability and validity of the research instrument. Additional diagnostic tests, including multicollinearity assessment, common method bias analysis, and model fit indices such as the Comparative Fit Index (CFI), Tucker-Lewis Index (TLI), Root Mean Square Error of Approximation (RMSEA), and Standardized Root Mean Square Residual (SRMR), will be conducted to ensure the adequacy, consistency, reliability, and robustness of the structural model. The study anticipates that debt recovery will have a significant positive effect on the financial performance of Deposit Money Banks in Nigeria. Effective debt recovery mechanisms are expected to reduce non-performing loans, improve loan portfolio quality, strengthen liquidity, minimize credit losses, and enhance profitability. Banks with efficient debt recovery systems are also anticipated to improve cash flow, strengthen capital adequacy, enhance credit risk management, and increase investor and depositor confidence. Furthermore, robust debt recovery strategies are expected to improve operational efficiency, support sustainable lending practices, facilitate regulatory compliance, and strengthen the overall resilience of the banking sector. Conversely, weak debt recovery procedures, prolonged loan recovery periods, ineffective legal enforcement, poor credit monitoring, and inadequate collateral management may increase loan defaults, reduce earnings, weaken asset quality, and adversely affect financial performance. Consequently, effective debt recovery is expected to contribute significantly to improving profitability, financial stability, operational resilience, and long-term sustainability among Deposit Money Banks in Nigeria. This study is expected to make significant theoretical and empirical contributions to the literature on accounting, banking, credit risk management, and financial management by providing comprehensive evidence on the relationship between debt recovery and the financial performance of Deposit Money Banks in Nigeria. Unlike previous studies that broadly examined non-performing loans or credit risk management, this research specifically evaluates debt recovery as a strategic determinant of financial performance using primary data and Structural Equation Modeling (SEM). The findings will provide valuable insights for the Central Bank of Nigeria (CBN), the Nigeria Deposit Insurance Corporation (NDIC), Deposit Money Banks, financial regulators, policymakers, professional accounting bodies, risk management professionals, investors, and academic researchers regarding the strategic importance of effective debt recovery in promoting banking stability and profitability. The study will also provide evidence-based recommendations for strengthening debt recovery policies, improving loan monitoring systems, enhancing collateral management, reinforcing legal recovery mechanisms, reducing non-performing loans, and fostering sustainable banking operations in Nigeria.

Keywords: Debt recovery, financial performance, Deposit Money Banks, credit risk management, non-performing loans, loan recovery, Structural Equation Modeling (SEM), banking performance, asset quality, Nigeria.