UNSYSTEMATIC RISK AND FINANCIAL PERFORMANCE OF LICENSED DEPOSIT MONEY BANKS IN NIGERIA: DOES INFLATION MATTER?

Abstract

Rapid macroeconomic instability and recurring inflationary pressures in Nigeria have raised concerns about how external shocks interact with bank-specific risks to influence the stability and profitability of financial institutions. This study examined the moderating effect of inflation on the relationship between unsystematic risk and the financial performance of Deposit Money Banks (DMBs) in Nigeria from 2010 to 2024. Unsystematic risk was proxied by Non-Performing Loans (NPL), Loan-to-Deposit Ratio (LDR), and Cost-to-Income Ratio (CIR), while Return on Assets (ROA) measured financial performance. Secondary data from 13 licensed banks were analyzed using panel regression techniques in Stata, with Capital Adequacy Ratio (CAR), Asset Size (AST), and Gross Domestic Product (GDP) as control variables. The results reveal that NPL, LDR, and CIR have significant negative effects on ROA. However, inflation and its interaction terms were statistically insignificant, showing that inflation does not significantly moderate these relationships. The findings confirm the trade-off theory of risk and return and the macroeconomic risk theory, highlighting those internal bank-specific risks exert stronger influence on profitability than external inflationary shocks. The study recommends that banks strengthen credit monitoring, optimize liquidity structures, improve operational efficiency through digitalization, and regulators enforce adequate capitalization and inflation control measures to enhance the resilience and performance of Nigerian banks.