Granger Causality on Digital Capital Expenditure, Bank Size and Credit Risk Management of Deposit Money Banks in Nigeria

Abstract

In the rapidly evolving global financial ecosystem, banking institutions are increasingly integrating advanced technological infrastructures into their core operational frameworks. While digital capital expenditure can influence financial stability, the precise direction and strength of this relationship in the Nigerian context remains under-researched and poorly understood. This study sought to investigate the causal relationship between digital capital expenditure and the credit risk management of Nigerian deposit money banks, considering the role of bank size. This study employed correlation analysis and pairwise Granger causality techniques. Correlation analysis is essential for understanding the strength and direction of the linear relationship between digital investments and credit risk indicators. Pairwise Granger causality, on the other hand, allows for testing the temporal direction of influence between variables, thereby addressing the question of whether changes in digital infrastructure investments “Granger-cause” changes in credit risk outcomes, or vice versa. This study utilized secondary data sourced from the published audited annual reports and financial statements of 12 selected deposit money banks in Nigeria over a 10-year period (2015–2024). A panel data causality analysis was employed to examine the directional effect of digital capital expenditure on credit risk metrics. Granger causality test results revealed that digital capital expenditure significantly influences the non-performing loan ratio (F = 4.1721, p = 0.0185), but there is no reverse causality (F = 0.1884, p = 0.8286). Furthermore, digital capital expenditure significantly impacts the capital adequacy ratio (F = 8.6627, p = 0.0004), while the capital adequacy ratio does not influence digital capital expenditure (F = 0.6098, p = 0.5457). Bank size significantly affects capital adequacy (F = 4.1809, p = 0.0183), but the reverse does not hold (F = 0.8170, p = 0.4450). The study concluded that digital capital expenditure and bank size have strong predictive power over credit risk management behavior, while the reverse does not hold. It is therefore recommended that bank management proactively prioritize investments in digital infrastructure. Since digital capital expenditure has a unidirectional impact on improving asset quality and solvency, institutions must treat these investments as a core strategic risk management tool rather than mere operational costs to enhance overall financial stability.