CURRENCY SUBSTITUTION ON NON-PERFORMING LOANS IN NIGERIA: THE IMPACT ANALYSIS

Abstract

Currency substitution is a phenomenon. It is the preference of local residents to desire foreign currencies above their national currency. This is possible where the national currency fails to perform effectively to a great extent the traditional functions of medium of exchange, units of account and store of value. The increase in the choice by the economic agents is suspected to have impact on non-performing loan profile in Nigeria with the recognition of structural breaks within the study period of 2007 – 2022 (16 years) hence the research interest. The researcher adopted the autoregressive distributed lag (ARDL) model to execute the study interest with the addition of the pre and post estimation techniques to fine tune the distributional properties. The study found that foreign currency deposits (FCD) had a negative and statistically significant influence on the non-performing loan ratio (NPLR), which signified that currency substitution had a weak and non-direct but significant impact on non-performing loan profiles in the country, evidenced from the negative consequences of change of choice by economic agents to switch from local currency holdings to foreign currency holdings. And further point that there exist other economic variables that influence the non-performing loans. The study recommended that government should create policies that would promote the private and SME sectors to function so as to repay their maturing credits as they fall due